EX 257 Makeorbuy decision OBJ 1 Diamond Computer Company has

EX 25-7 Make-or-buy decision OBJ. 1 Diamond Computer Company has been purchasing carrying caseoperating ers at a purchase price of $59 per unit. The company, which is for its portable comput- company, which is currently operating below to production at the rate of 40% of direct labor cost. The fully absorbed unit costs to produce comparable carrying to be as follows: Direct materials Direct labor Factory overhead (40% of direct labor) Total cost per unit $35.00 18.00 7.20 $60.20 If Diamond Computer Company manufactures the carrying cases d costs will not increase and variable factory overhead costs associated with the cases fixed factory over- hea are expected to be 15% of the direct labor costs. a. Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. b.- , On the basis of the data presented, would it be advisable to malke the ca ing cases or to continue buying them? Explain. rry-

Solution

Make Buy Differential Effect Cost: Purchase price 59.00 59 Direct material 35 0.00 -35 Direct Labour 18 0.00 -18 Variable factory OH 2.70 0.00 -2.7 Fixed Factory Oh 4.50 4.50 0 Income (loss) 60 63.50 3.3 the carrying cost should be manufactured since cost per unit would decrease by $ 3.30 by doinng so. The fixed OH is irrelevant to the decision.