Make-or-Buy Decision

Watts Technologies Company has been purchasing carrying cases for its portable tablets at a delivered cost of $6.50 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 60% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$2.00
Direct labor	3.25
Factory overhead (60% of direct labor)	1.95
Total cost per unit	$7.20

If Watts Technologies 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 20% of the direct labor costs.

a. Prepare a differential analysis report for the make-or-buy decision. Enter your final answer as a positive amount if it represents a net cost savings; enter a negative amount if it represents an increase in cost.

WATTS TECHNOLOGIES COMPANY
Manufacture Carrying Case
Differential Analysis Report
Purchase price of carrying case		$
Differential cost to manufacture carrying case:
Direct materials	$
Direct labor
Variable factory overhead
		$

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b. On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? It would be advisable to manufacture the carrying cases because the cost savings would be $ per unit. Fixed factory overhead is irrelevant since it will continue whether the carrying cases are purchased or manufactured .