Make-or-Buy Decision

Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $55 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 44% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$27
Direct labor	17
Factory overhead (44% of direct labor)	7.48
Total cost per unit	$51.48

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 15% of the direct labor costs.

Question Content Area

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 ecada00a900e00c_1	$fill in the blank ecada00a900e00c_2	$fill in the blank ecada00a900e00c_3
Direct materials	fill in the blank ecada00a900e00c_4	fill in the blank ecada00a900e00c_5	fill in the blank ecada00a900e00c_6
Direct labor	fill in the blank ecada00a900e00c_7	fill in the blank ecada00a900e00c_8	fill in the blank ecada00a900e00c_9
Variable factory overhead	fill in the blank ecada00a900e00c_10	fill in the blank ecada00a900e00c_11	fill in the blank ecada00a900e00c_12
Fixed factory overhead	fill in the blank ecada00a900e00c_13	fill in the blank ecada00a900e00c_14	fill in the blank ecada00a900e00c_15
Total unit costs	$fill in the blank ecada00a900e00c_16	$fill in the blank ecada00a900e00c_17	$fill in the blank ecada00a900e00c_18

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.