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 42% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:
|Factory overhead (42% of direct labor)||6.72|
|Total cost per unit||$47.72|
If Somerset Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 12% of the direct labor costs.
a. Prepare a differential analysis dated April 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If required, round your answers to two decimal places. If an amount is zero, enter "0".
|Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)|
|Variable factory overhead|
|Fixed factory overhead|
|Total unit costs||$||$||$|
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.
Differential analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that can be incurred from the available alternative options of business by leaving out irrelevant information.
Prepare a differential analysis dated April 30 to determine whether the co...
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