Problem
Jupiter Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $83 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 fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:
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Direct materials
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$57
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Direct labor
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20
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Factory overhead (40% of direct labor)
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8
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Total cost per unit
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$85
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If Jupiter 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 10% of the direct labor costs.
Required:
A. Prepare a differential analysis, dated July 19 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
B. On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain.
Assuming there were no better alternative uses for the spare capacity, it would to manufacture the carrying cases because the cost savings would be $4 per unit. Fixed factory overhead is because it will continue whether the carrying cases are purchased or manufactured.
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Make Carrying Case
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Buy Carrying Case
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Differential Effect on Income
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(Alternative 1)
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(Alternative 2)
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(Alternative 2)
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