Make-or-Buy Decision

Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $58 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 36% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$30
Direct labor	20
Factory overhead (36% of direct labor)	7.2
Total cost per unit	$57.2

If Fremont 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 16% of the direct labor costs.

Question Content Area

a. Prepare a differential analysis dated September 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". Use a minus sign to indicate a loss.

Differential Analysis Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2) September 30

	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales price	$fill in the blank 9ddcfb09afd8fce_1	$fill in the blank 9ddcfb09afd8fce_2	$fill in the blank 9ddcfb09afd8fce_3
Unit costs:
Purchase price	fill in the blank 9ddcfb09afd8fce_4	fill in the blank 9ddcfb09afd8fce_5	fill in the blank 9ddcfb09afd8fce_6
Direct materials	fill in the blank 9ddcfb09afd8fce_7	fill in the blank 9ddcfb09afd8fce_8	fill in the blank 9ddcfb09afd8fce_9
Direct labor	fill in the blank 9ddcfb09afd8fce_10	fill in the blank 9ddcfb09afd8fce_11	fill in the blank 9ddcfb09afd8fce_12
Variable factory overhead	fill in the blank 9ddcfb09afd8fce_13	fill in the blank 9ddcfb09afd8fce_14	fill in the blank 9ddcfb09afd8fce_15
Fixed factory overhead	fill in the blank 9ddcfb09afd8fce_16	fill in the blank 9ddcfb09afd8fce_17	fill in the blank 9ddcfb09afd8fce_18
Income (Loss)	$fill in the blank 9ddcfb09afd8fce_19	$fill in the blank 9ddcfb09afd8fce_20	$fill in the blank 9ddcfb09afd8fce_21

Question Content Area

b. Assuming there were no better alternative uses for the spare capacity, it would

be advisablenot be advisable

to manufacture the carrying cases. Fixed factory overhead is

relevantirrelevant

to this decision.