Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $40 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 25% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows: Cost Driver Dollar Amount per Unit Direct materials $15 Direct labor 20 Factory overhead (25% of direct labor) 5 Total cost per unit 40 If Fremont 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 5% of the direct labor costs. a. Prepare a differential analysis dated September 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case.
Fremont Computer Company has been purchasing carrying cases for its portable computers at a
purchase price of $40 per unit. The company, which is currently operating below full capacity,
charges factory
produce comparable carrying cases are expected to be as follows:
Cost Driver Dollar Amount per Unit
Direct materials $15
Direct labor 20
Factory overhead (25% of direct labor) 5
Total cost per unit 40
If Fremont Computer Company manufactures the carrying cases, fixed
will not increase and variable factory overhead costs associated with the cases are expected to
be 5% of the direct labor costs.
a. Prepare a differential analysis dated September 30 to determine whether the company
should make (Alternative 1) or buy (Alternative 2) the carrying case.
b. Based on the data presented, would it be advisable to make the carrying cases or to
continue buying them? Explain in your own words.
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