Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $57 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 43% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:
Direct materials $30
Direct labor 17
Factory overhead (43% of direct labor) 7.31
Total cost per unit $54.31
If Somerset 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 25% of the direct labor costs.
Prepare a differential analysis dated April 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case.
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