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Social ScienceMake-or-Buy DecisionSomerset 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 45% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:Direct materials$25Direct labor18Factory overhead (45% of direct labor)8.1Total cost per unit$51.1If 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 AnalysisMake Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)April 30 MakeCarryingCase(Alternative 1)BuyCarryingCase(Alternative 2)DifferentialEffects(Alternative 2)Unit costs: Purchase price$$$Direct materials Direct labor Variable factory overhead Fixed factory overhead Total unit costs$$$
Make-or-Buy Decision
Somerset 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 45% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:
| Direct materials | $25 |
| Direct labor | 18 |
| Factory overhead (45% of direct labor) | 8.1 |
| Total cost per unit | $51.1 |
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 | $ | $ | $ |
Expert Answer
In make or buy decision, we need to compare the unit cost of producing and the unit cost of buying the product and whichever cost is lower, that course is selected i.e. manufacturing or buying. While computing the manufacturing costs, fixed costs are considered sunk cost and hence not included in cost computation. Only those expenses which increase the costs of the compny if the product is manufactured are included in cost of production.
The required computation ha...
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Differential Analysis Make Carrying case (Alt 1) or Buy Carrying Case (Alt 2) 30-Apr Make Carrying Case (Alternative 1) Differential Effects Buy Carrying case (Alternative 2) (Alternative 2) Unit costs Purchase price Direct materials Direct labor Variable fctory overhead (12% of direct labor) Fixed factory overhead Total unit costs 61. 61. 25 0 -25 18 0 -18 2.16 -2.16 0 45.16 61 15.84
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