Coram Audio makes wireless headphones. Each pair of headphones comes with a travel case. Since its founding, Coram has manufactured its own travel cases. Recently, Holmur Travel Gear (HTG), a local outfitter that manufactures and sells backpacks, tent cases, and so on, contacted Coram and proposed that it produce the headphone travel cases. Based on management experience, Coram’s cost per travel case is as follows (based on annual production of 40,000 units).

HTG has offered to sell the case to Coram for $39 each. The total order would amount to 40,000 travel cases per year. Coram’s management decides that it will make the switch to HTG cases if Coram can save at least $12,000 per year. Accepting the offer would eliminate annual fixed overhead of $76,000. 

Required

Should Coram continue to make the travel cases or buy them from HTG? Prepare a schedule that shows the differential costs per travel case.

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Direct materials Direct labor..... Variable overhead. Fixed overhead. Total..... $10.00 21.20 6.40 4.70 $42.30