11.1.3

Laredo Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,320. The freight and installation costs for the equipment are $600. If purchased, annual repairs and maintenance are estimated to be $390 per year over the four-year useful life of the equipment. Alternatively, Laredo Corporation can lease the equipment from a domestic supplier for $1,560 per year for four years, with no additional costs.

Prepare a differential analysis dated March 15 to determine whether Laredo Corporation should lease (Alternative 1) or purchase (Alternative 2) the equipment. (Hint: This is a lease or buy decision, which must be analyzed from the perspective of the equipment user, as opposed to the equipment owner.) If an amount is zero, enter "0".

Differential Analysis
Lease (Alt. 1) or Buy (Alt. 2) Equipment
March 15
	Lease Equipment (Alternative 1)	Buy Equipment (Alternative 2)	Differential Effects (Alternative 2)
Costs:
Purchase price	$___	$___	$____
Freight and installation	___	___	____
Repair and maintenance (4 years)	____	___	____
Lease (4 years)	____	____	___
Total costs	$___	$____	$____

Make-or-Buy Decision

Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $62 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 41% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$25
Direct labor	22
Factory overhead (41% of direct labor)	9.02
Total cost per unit	$56.02

If Somerset Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 12% of the direct labor costs.

a. Prepare a differential analysis dated April 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If required, round your answers to two decimal places. If an amount is zero, enter "0".

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
April 30
	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effects (Alternative 2)
Unit costs:
Purchase price	$____	$__	$____
Direct materials	____	___	___
Direct labor	____	___	____
Variable factory overhead	____	___	____
Fixed factory overhead	____	___	___
Total unit costs	$____	$____	$___