Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $59 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 44% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows: Direct materials Direct labor Factory overhead (44% of direct labor) Total cost per unit 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 16% 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 Unit costs: Purchase price $30 22 9.68 $61.68 Direct materials Direct labor Variable factory overhead Fixed factory overhead Total unit costs Make Carrying Case (Alternative 1) (Alternative 2) Buy Carrying Case Differential Effects (Alternative 2) 1000000 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.
Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $59 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 44% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows: Direct materials Direct labor Factory overhead (44% of direct labor) Total cost per unit 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 16% 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 Unit costs: Purchase price $30 22 9.68 $61.68 Direct materials Direct labor Variable factory overhead Fixed factory overhead Total unit costs Make Carrying Case (Alternative 1) (Alternative 2) Buy Carrying Case Differential Effects (Alternative 2) 1000000 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Make-or-Buy Decision
Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $59 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 44% of direct labor cost. The unit costs to
produce comparable carrying cases are expected to be as follows:
Direct materials
Direct labor
Factory overhead (44% of direct labor)
Total cost per unit
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 16% of the direct labor costs.
Unit costs:
$30
22
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
Purchase price
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
Total unit costs
9.68
$61.68
Make
Carrying
Buy
Carrying
Case
Case
(Alternative 1) (Alternative 2)
Differential
Effects
(Alternative 2)
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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