Coram Audio makes wireless headphones. Each pair of headphones comes with a travel case. Since its founding, Coram has manufactured its own travel cases. Recently, Holmur Travel Gear (HTG), a local outfitter that manufactures and sells backpacks, tent cases, and so on, contacted Coram and proposed that they produce the headphone travel cases. Based on management experience, Coram's cost per travel case is as follows (based on annual production of 41,800 units). Direct materials $ 10.00 Direct labor 21.20 Variable overhead 6.40 Fixed overhead 4.70 Total $ 42.30 HTG has offered to sell the case to Coram for $39 each. The total order would amount to 41,800 travel cases per year. Coram's management decides that they will make the switch to HTG cases if Coram can save at least $12,900 per year. Accepting the offer would eliminate annual fixed overhead of $79,420. Required: a. Prepare a schedule that shows the total differential costs. b. Should Coram continue to make the travel cases or buy them from HTG?
Coram Audio makes wireless headphones. Each pair of headphones comes with a travel case. Since its founding, Coram has manufactured its own travel cases. Recently, Holmur Travel Gear (HTG), a local outfitter that manufactures and sells backpacks, tent cases, and so on, contacted Coram and proposed that they produce the headphone travel cases. Based on management experience, Coram's cost per travel case is as follows (based on annual production of 41,800 units).
| Direct materials | $ 10.00 |
|---|---|
| Direct labor | 21.20 |
| Variable |
6.40 |
| Fixed overhead | 4.70 |
| Total | $ 42.30 |
HTG has offered to sell the case to Coram for $39 each. The total order would amount to 41,800 travel cases per year. Coram's management decides that they will make the switch to HTG cases if Coram can save at least $12,900 per year. Accepting the offer would eliminate annual fixed overhead of $79,420.
Required:
a. Prepare a schedule that shows the total differential costs.
b. Should Coram continue to make the travel cases or buy them from HTG?
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