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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Make or buy decision

Diamond Computer Company has been pure basing 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.

a. Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case.

b. On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain.

a)

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business

To Prepare: The differential analysis of Company DC as on February 24, for given alternatives.

Explanation

The differential analysis of Company DC as on February 24, for given alternatives is shown below.

Differential Analysis of Company DC
Make (Alt. 1) or Purchase (Alt. 2) Carrying Cases
February 24
Make Carrying Cases  (Alternative 1) Buy Carrying Cases     (Alternative 2) Differential effect on income
Sales price $0.00 $0.00 $0.00
Unit Costs:
 Purchase price per unit $0.00 (-)  $59.00 (-)  $59.00
 Direct Material per unit (-)  $35.00 $0.00 $35.00
 Direct Labor per unit (-)  $18.00 $0.00 $18.00
 Variable Factory Overhead per unit (1)   (-)  $2.70 $0.00 $2.70
 Fixed Factory Overhead per unit (2)   (-)  $4.50 (-)  $4.50 $0...

b)

To determine

To Deicide: Whether to make the carrying cases or to buy them.

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