I. Make or Buy (produce it or buy it)
Diamond Computer Company has been purchasing carrying cases for its laptop computers at a purchase price of $70 per unit. The company, which currently operates below its productive capacity, applies indirect production costs (factory overhead) at a rate of 40% of direct labor cost (at a rate of 40% of direct labor cost). The unit costs to produce the carrying cases for the computers are expected to be as follows:
If Diamond Computer Company manufactures the carrying cases for the computers, the factory overhead fixed costs will not increase and the factory overhead variable costs will be 15% of the direct labor cost.
a. Make the differential analysis report dated July 19 to determine whether the company should produce (make) or buy (buy) the carrying cases to transport the computers.
b. According to the results obtained from the differential analysis, would it be advisable to produce (make) or buy (buy) the carrying cases to transport the computers? explain.
II. Differential analysis for machine replacement or to continue its use (replace or continue)
Singapore Digital Components Company assembles circuit boards using hand-held machinery to insert electronic components. The original cost of the machine is $60,000, accumulated depreciation is $24,000, its remaining useful life is five years, and its salvage value is zero. On February 20, 20Y9, the company was presented with a proposal to replace the current manufacturing process with a fully automatic machine that will cost $111,000. The automatic machine has an estimated useful life of five years and a residual value of zero. The following annual data information regarding current operations was accumulated from the use of the machine and the results to be produced if the machine in use is replaced by automated equipment:
a. Make a differential analysis report to assess whether to continue using the machinery currently in use or to replace it with the automated machine.
b. According to the results obtained, should the current machine continue to be used or should it be replaced by the automated machine?
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