Make-or-Buy Decision

Matchless Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $58 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 36% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$27
Direct labor	20
Factory overhead (36% of direct labor)	7.2
Total cost per unit	$54.2

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.

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a. Prepare a differential analysis dated February 24 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 "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2) February 24

	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales Price	$fill in the blank 7981c5f7603f041_1	$fill in the blank 7981c5f7603f041_2	$fill in the blank 7981c5f7603f041_3
Costs:
Purchase price	$fill in the blank 7981c5f7603f041_4	$fill in the blank 7981c5f7603f041_5	$fill in the blank 7981c5f7603f041_6
Direct materials per unit	fill in the blank 7981c5f7603f041_7	fill in the blank 7981c5f7603f041_8	fill in the blank 7981c5f7603f041_9
Direct labor per unit	fill in the blank 7981c5f7603f041_10	fill in the blank 7981c5f7603f041_11	fill in the blank 7981c5f7603f041_12
Variable factory overhead per unit	fill in the blank 7981c5f7603f041_13	fill in the blank 7981c5f7603f041_14	fill in the blank 7981c5f7603f041_15
Fixed factory overhead per unit	fill in the blank 7981c5f7603f041_16	fill in the blank 7981c5f7603f041_17	fill in the blank 7981c5f7603f041_18
Income (Loss)	$fill in the blank 7981c5f7603f041_19	$fill in the blank 7981c5f7603f041_20	$fill in the blank 7981c5f7603f041_21

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a. For the make and buy alternatives provide the unit costs. Use percentage to separate variable and fixed costs. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2.

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b. Assuming there were no better alternative uses for the spare capacity, it would

be advisablenot be advisablebe advisable

to manufacture the carrying cases. Fixed factory overhead is

relevantirrelevantirrelevant

to this decision.

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