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University of the People *

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3304

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Accounting

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Nov 24, 2024

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docx

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a. Differential Analysis: Alternative 1 ( making internally) Alternative 2 (Buying from outside) Differential Account Alternative 1 Variable costs Costs to buy from outside $0 800,000 800,000 Lower Direct Materials 200,000 - 200,000 Higher Direct labor 100,000 - 100,000 Higher Manufacturing overhead 300,000 - 300,000 Higher Fixed costs Factory building and equipment Lease 70,000 - 70,000 Factory insurance 50,000 - 50,000 Production supervisor’s salary 100,000 100,000 Total production costs 820,000 900,000 80,000 Lower
Based on the differential analysis provided, Alternative 1 (making internally) appears to be the best option. The variable costs associated with making internally are $0, while the costs to buy from outside are $800,000, making the differential account $800,000 lower for Alternative 1. Additionally, while Alternative 1 has higher direct materials, direct labor, and manufacturing overhead costs, the total production costs for Alternative 1 are $80,000 lower than Alternative 2. Therefore, considering both the variable and fixed costs, Alternative 1 is the best option. References Heisinger, K., & Hoyle, J. B. (2012). Managerial Accounting. Creative Commons by-nc-sa 3.0. https://open.umn.edu/opentextbooks/textbooks/managerial-accounting
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