E25-15 However, what if Smart Touch Learning can avoid some fixed costs by outsourcing the casings? Assume that management can reduce fixed overhead cost by $12,000 by outsourcing the casings. Smart Touch Learning will still incur $7,200 by($19,200-$12,000) if it oursources the casings. In this case, fixed costs become relevant to the decision because they differ between alternatives. E25-15 shows the differential analysis when fixed cost will change.

Differential Analysis for Outsourcing Decision When Fixed Costs Will Change

Casing Costs	Make Casings	Outsource Casings	Difference (Make-Outsource)
Variable Costs
Direct Materials	$15,600		$15,600
Direct Labor	7,200		7,200
Variable manufacturing overhead	13,200		13,200
Fixed manufacturing overhead cost	12,000		12,000
Purchase cost ($21x2,400 casings)		$50,400	(50,400)
Total differential cost of casings	$48,000	$50,400	$ (2,400)09