1. Make-or-Buy DecisionCompanion Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $61 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 39% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:Direct materials$29Direct labor20Factory overhead (39% of direct labor)7.8Total cost per unit$56.8If 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 15% of the direct labor costs.2. Machine Replacement DecisionA company is considering replacing an old piece of machinery, which cost $599,500 and has $349,400 of accumulated depreciation to date, with a new machine that has a purchase price of $483,600. The old machine could be sold for $63,000. The annual variable production costs associated with the old machine are estimated to be $157,300 per year for eight years. The annual variable production costs for the new machine are estimated to be $102,300 per year for eight years. a. Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. Ifrequired, round your answers to two decimal places. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers usea minus sign.Differential AnalysisMake Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)February 24Make CarryingBuy CarryingCase (Alternative 1) Case (Alternative 2) on Income (Alternative 2)Differential EffectSales Price2$Costs:Purchase priceDirect materials per unitDirect labor per unitVariable factory overhead per unitFixed factory overhead per unitIncome (Loss)b. Assuming there were no better alternative uses for the spare capacity, it wouldto manufacture the carrying cases. Fixed factory overheadisto this decision. a. Prepare a differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount iszero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.Differential AnalysisContinue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)April 29ContinueReplaceDifferentialwith OldOldEffectMachineMachineon Income(Alternative 1) (Alternative 2) (Alternative 2)Revenues:Proceeds from sale of old machineCosts:Purchase priceVariable productions costs (8 years)Income (Loss)Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.b. What is the sunk cost in this situation?The sunk cost is $

Answered: Make-or-Buy Decision Companion…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

1. Make-or-Buy Decision

Companion Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $61 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 39% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$29
Direct labor	20
Factory overhead (39% of direct labor)	7.8
Total cost per unit	$56.8

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 15% of the direct labor costs.

2. Machine Replacement Decision

A company is considering replacing an old piece of machinery, which cost $599,500 and has $349,400 of accumulated depreciation to date, with a new machine that has a purchase price of $483,600. The old machine could be sold for $63,000. The annual variable production costs associated with the old machine are estimated to be $157,300 per year for eight years. The annual variable production costs for the new machine are estimated to be $102,300 per year for eight years.

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
Buy Carrying
Case (Alternative 1) Case (Alternative 2) on Income (Alternative 2)
Differential Effect
Sales Price
2$
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.

a. Prepare a differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. 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
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
April 29
Continue
Replace
Differential
with Old
Old
Effect
Machine
Machine
on Income
(Alternative 1) (Alternative 2) (Alternative 2)
Revenues:
Proceeds from sale of old machine
Costs:
Purchase price
Variable productions costs (8 years)
Income (Loss)
Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.
b. What is the sunk cost in this situation?
The sunk cost is $

Expert Solution

Step 1

The decision of make or buy is defined as the act of using the cost- benefit in order to make the strategic decision among manufacturing the product in house or to buy the product from the external supplier. This situation arises when the producing company face problems with present suppliers and diminishing capacity.

NOTE: Answering the first question as there multiple questions, please submit a new question.

Step 2

a. The differential analysis is shown as:

Differential analysis

Make Carrying case (Alt. 1) Or Buy Carrying case (Alt. 2)

February 24

	Make Carrying Case (Alt. 1)	Buy Carrying Case (Alt. 2)	Differential Effect on Income (Alt. 2)
Sales
Costs:
Purchase Price		$61	-$61
Direct material per unit	$29	-	$29
Direct Labor per unit	$20	-	$20
Variable factory overhead per unit	$3	-	$3
Fixed factory overhead per unit	$4.8	$4.8	-
Income (Loss)	$56.8	$65.8	-$9

Working Note:

1. Computing variable factory overhead as:

$\begin{array}{rcl} V a r i a b l e f a c t o r y o v e r h e a d & = & 15 % \times D i r e c t l a b o r \\ = & 15 % \times $ 20 \\ = & $ 3 \end{array}$

2. Computing fixed factory overhead per unit as:

$\begin{array}{rcl} F i x e d f a c t o r y o v e r h e a d p e r u n i t & = & F a c t o r y o v e r h e a d - V a r i a b l e f a c t o r y o v e r h e a d p e r u n i t \\ = & $ 7.8 - $ 3 \\ = & $ 4.8 \end{array}$

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