Problem
Make-or-Buy Decision
Matchless Computer Company has been purchasing carrying cases for its portable computers at a delivered cost of $58 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 38% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:
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Direct materials
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$30.00
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Direct labor
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21.00
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Factory overhead (38% of direct labor)
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7.98
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Total cost per unit
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$58.98
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If Matchless 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 October 11, 2014, 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 zero "0".
b. Assuming there were no better alternative uses for the spare capacity, it would Selectbe advisablenot be advisableCorrect 1 of Item 2 to manufacture the carrying cases. Fixed factory overhead is SelectrelevantirrelevantCorrect 2 of Item 2 to this decision.