Question 24.3: A company manufactures a subcomponent of an assembly for $80...

Financial and Managerial Accounting

A company manufactures a subcomponent of an assembly for $80 per unit, including fixed costs of $25 per unit. A proposal is offered to purchase the subcomponent from an outside source for $60 per unit, plus $5 per unit freight. Prepare a differential analysis dated November 2, 2014, to determine whether the company should make (Alternative 1) or buy (Alternative 2) the subcomponent, assuming fixed costs are unaffected by the decision.

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Differential Analysis Make Subcomponent (Alternative 1) or Buy Subcomponent (Alternative 2) November 2, 2014
	Make Subcomponent (Alternative 1)	Buy Subcomponent (Alternative 2)	Differential Effect on Income (Alternative 2)
Unit costs:
Purchase price ………………..	$ 0	–$60	–$60
Freight ……………………..	0	–5	–5
Variable costs ($80 – $25) ……….	–55	0	55
Fixed factory overhead……………..	–25	–25	0
Income (loss) …………………..	$\underline{\underline{–\$ \ 80}}$	$\underline{\underline{–\$ \ 90}}$	$\underline{\underline{–\$ \ 10}}$

The company should make the subcomponent.

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