hw14 - ORIE 350 Fall 2006 Homework #14 Due December 5, 2006...

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ORIE 350 Fall 2006 Homework #14 Due December 5, 2006 1. Quick Computer has been purchasing carrying cases for its portable computers at a delivered cost of $35 each. The company, which is currently operating below full capacity, charges factory overhead to production at a rate of 40% of direct materials cost. The costs to produce comparable cases in-house is $18 per unit for direct materials and $10 per unit for direct labor. If Quick 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 materials costs. On the basis of the presented data, would it be advisable to make or to buy the carrying cases? The fixed overhead is not a concern. The problems states that it will not increase if Quick makes the cases. The cost driver that Quick uses to assign overhead to jobs is 40% of the direct material cost. Hence, $7.20 (40% of $18) would be assigned to each case, as well as the $28 in direct material and direct labor cost for a total of $35.20. But, that just uses the overhead cost driver. As we know, the overhead cost driver is merely a means to assign costs to each manufactured item; it does not represent the actual cost of manufacturing the item. For Quick Computer, the only costs that would actually be incurred, those costs that would actually increase if Quick Computer were to make the cases are direct material, direct labor, and variable overhead, totaling $32.50 per unit. Clearly, this is cheaper than buying them. They should make the cases, saving $2.50 per unit. Why would absorption costing show that the cases cost $35.20 each? Because $2.70 of cost now being allocated to other products would be attached to the cases instead. Some students applied overhead to the purchased cases. Manufacturing overhead is only assigned to manufactured products. If a component is purchases, the cost is the price paid.
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This note was uploaded on 03/03/2008 for the course ORIE 350 taught by Professor Callister during the Fall '08 term at Cornell.

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hw14 - ORIE 350 Fall 2006 Homework #14 Due December 5, 2006...

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