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 42% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $27 Direct labor 16 Factory overhead (42% of direct labor) 6.72 Total cost per unit $49.72 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 12% of the direct labor costs. 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 ? ? ? Direct materials ? ? ? Direct labor ? ? ? Variable factory overhead ? ? ? Fixed factory overhead ? ? ? Total unit costs ? ? ? 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.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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
| Direct materials | $27 |
| Direct labor | 16 |
| Factory overhead (42% of direct labor) | 6.72 |
| Total cost per unit | $49.72 |
If Somerset Computer Company manufactures the carrying cases, fixed
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 | ? | ? | ? |
| Direct materials | ? | ? | ? |
| Direct labor | ? | ? | ? |
| Variable factory overhead | ? | ? | ? |
| Fixed factory overhead | ? | ? | ? |
| Total unit costs | ? | ? | ? |
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.
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