Question

Diamond 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 40% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:
Direct materials $35.00
Direct labor 18.00
Factory overhead (40% of direct labor) 7.20
Total cost per unit $60.20
If Diamond 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.
Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If an amount is zero, enter zero "0". If required, round your answers to two decimal places. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Answer 1

Answer:

Diamond Computer Company

The company should make (Alternative 1) the cases.

Explanation:

a) Data and Calculations:

Purchase price of portable computer cases = $59 per unit

Alternative 1: Make

Direct materials        $35.00

Direct labor                 18.00

Variable overhead       2.70 (15% of $18.00)

Total variable  cost $55.70

Alternative 2: Buy

Purchase price = $59

b) A make or buy decision is determined by preparing a differential analysis.  The differential or incremental analysis evaluates the changes in revenues, costs, and profits resulting from Diamond's decision to make or purchase the computer carrying cases.