TEXT VERSION:

Make-or-Buy Decision

Companion Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $60 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 38% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

Differential Analysis for a Discontinued Product

A condensed income statement by product line for British Beverage Inc. indicated the following for King Cola for the past year:

Sales	$235,600
Cost of goods sold	109,000
Gross profit	$126,600
Operating expenses	142,000
Loss from operations	$(15,400)

It is estimated that 13% of the cost of goods sold represents fixed factory overhead costs and that 22% of the operating expenses are fixed. Since King Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued.

a. Prepare a differential analysis, dated March 3, to determine whether King Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "0". Use a minus sign to indicate a loss.

Differential Analysis
Continue King Cola (Alt. 1) or Discontinue King Cola (Alt. 2)
January 21
	Continue King Cola (Alternative 1)	Discontinue King Cola (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs:
Variable cost of goods sold
Variable operating expenses
Fixed costs
Income (Loss)	$	$	$

b. Should Star Cola be retained? Explain.

As indicated by the differential analysis in part (A), the income would by $ if the product is discontinued.

If Companion 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 14% of the direct labor costs.

a. Prepare a differential analysis dated February 24 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". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
February 24
	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales Price	$	$	$
Costs:
Purchase price	$	$	$
Direct materials per unit
Direct labor per unit
Variable factory overhead per unit
Fixed factory overhead per unit
Income (Loss)	$	$	$

b. Assuming there were no better alternative uses for the spare capacity, it would to manufacture the carrying cases. Fixed factory overhead is to this decision.

Differential Analysis for a Discontinued Product A condensed income statement by product line for British Beverage Inc. indicated the following for King Cola for the past year: Sales $235,600 Cost of goods sold 109,000 Gross profit S126,600 Operating expenses 142,000 Loss from operations $(15,400) It is estimated that 13% of the cost of goods sold represents fixed factory overhead costs and that 22% of the operating expenses are fixed. Since King Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued. a. Prepare a differential analysis, dated March 3, to determine whether King Cola should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter zero "O". Use a minus sign to indicate a loss. Differential Analysis Continue King Cola (Alt. 1) or Discontinue King Cola (Alt. 2) January 21 Differential Effect Continue King Discontinue King on Income Cola (Alternative 1) Cola (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable operating expenses Fixed costs Income (Loss) b. Should Star Cola be retained? Explain. As indicated by the differential analysis in part (A), the income would by s if the product is discontinued