Make-or-Buy Decision Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $24 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 unit costs to produce comparable carrying cases are expected to be as follows:
Direct materials $8.00
Direct labor 12.00
Factory overhead (40% of direct labor) 4.80
Total cost per unit $24.80
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 25% 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 an amount is zero, enter "0". If required, round your answers to two decimal places.
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