Make-or-Buy Decision

Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $40 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 25% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$16
Direct labor	20
Factory overhead (25% of direct labor)	5
Total cost per unit	$41

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 5% 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 an amount is zero, enter "0". If required, round your answers to two decimal places. 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 0af589031fa1fdf_1	$fill in the blank 0af589031fa1fdf_2	$fill in the blank 0af589031fa1fdf_3
Unit costs:
Purchase price	fill in the blank 0af589031fa1fdf_4	fill in the blank 0af589031fa1fdf_5	fill in the blank 0af589031fa1fdf_6
Direct materials	fill in the blank 0af589031fa1fdf_7	fill in the blank 0af589031fa1fdf_8	fill in the blank 0af589031fa1fdf_9
Direct labor	fill in the blank 0af589031fa1fdf_10	fill in the blank 0af589031fa1fdf_11	fill in the blank 0af589031fa1fdf_12
Variable factory overhead	fill in the blank 0af589031fa1fdf_13	fill in the blank 0af589031fa1fdf_14	fill in the blank 0af589031fa1fdf_15
Fixed factory overhead	fill in the blank 0af589031fa1fdf_16	fill in the blank 0af589031fa1fdf_17	fill in the blank 0af589031fa1fdf_18
Income (loss)	$fill in the blank 0af589031fa1fdf_19	$fill in the blank 0af589031fa1fdf_20	$fill in the blank 0af589031fa1fdf_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.