Make-or-Buy Decision

Somerset 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 45% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$27
Direct labor	21
Factory overhead (45% of direct labor)	9.45
Total cost per unit	$57.45

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 16% 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	$fill in the blank 74da00f8bf9dfd8_1	$fill in the blank 74da00f8bf9dfd8_2	$fill in the blank 74da00f8bf9dfd8_3
Direct materials	fill in the blank 74da00f8bf9dfd8_4	fill in the blank 74da00f8bf9dfd8_5	fill in the blank 74da00f8bf9dfd8_6
Direct labor	fill in the blank 74da00f8bf9dfd8_7	fill in the blank 74da00f8bf9dfd8_8	fill in the blank 74da00f8bf9dfd8_9
Variable factory overhead	fill in the blank 74da00f8bf9dfd8_10	fill in the blank 74da00f8bf9dfd8_11	fill in the blank 74da00f8bf9dfd8_12
Fixed factory overhead	fill in the blank 74da00f8bf9dfd8_13	fill in the blank 74da00f8bf9dfd8_14	fill in the blank 74da00f8bf9dfd8_15
Total unit costs	$fill in the blank 74da00f8bf9dfd8_16	$fill in the blank 74da00f8bf9dfd8_17	$fill in the blank 74da00f8bf9dfd8_18

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.