Accounting 26th Edition by Carl Warren ,Jim Reeve ,Jonathan Duchac

Exercise 62

Make-or-buy decision
Jupiter Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $70 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:

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 15% of the direct labor costs.
a. Prepare a differential analysis, dated July 19 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 make the carrying cases or to continue buying them Explain.