Make-or-Buy Decision

Eclipse Computer Company has been purchasing carrying cases for its portable computers at a delivered cost of $65 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 40% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

If Eclipse 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 15% of the direct labor costs.

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Hint(s)

a. Prepare adifferential analysis, dated July 19, 2014, to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If an amount is zero, enter zero "0". If required, round your answers to two decimal places.

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
July 19, 2014
Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effect on Income (Alternative 2)
Costs:
Purchase price	$	$	$
Direct materials per unit
Direct labor per unit
Variable factory overhead per unit
Fixed factory overhead per unit
Income (Loss)	$	$	$

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a. FollowExample Exercise 24-3. For the make and buy alternatives provide the unit costs. Use percentage to separate variable and fixed costs. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.

Learning Objective 1.

b. Assuming there were no better alternative uses for the spare capacity, it wouldSelectbe advisablenot be advisableCorrect 1 of Item 2to manufacture the carrying cases. Fixed factory overhead isSelectrelevantirrelevantCorrect 2 of Item 2to this decision.

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