Eclispe Computer Company has been purchasing carrying cases for its portable computer at a delivered cost of $65 per unit. The company, which is currebtly operating below full capacity, charges factory overhead to production at the rate of 40% of direct labor cost. The fully absorbed units costs to produce comparablr carrying cases are expected to be as follows:
Direct Materisl: $30
Direct labor: $25
Factory Overhead (40% of direct labor) $10
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Total Costs per Unit: $65
If Eclipse Computer Company manufactures the carrying cases, fixed 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 July 19, 2014, 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.