Carmen manufactures a unit called A2. Variable manufacturing costs per unit of A2 are as follows:The Don Company has offered to sell Carmen 5,000 units of A2 for $22 per unit. If Carmen accepts the offer, $60,000 of fixed manufacturing overhead will be eliminated.Applying differential analysis to the situation, what should Carmen do? Support your answers with the calculations you used to make your decision.Direct materials$1Direct labor$10Variable manufacturing overhead$5

 To determine whether Carmen should manufacture the units of A2 in-house or purchase them from The Don Company, we need to use differential analysis to compare the relevant costs associated with each option.

First, let's calculate the total variable cost per unit of manufacturing A2 in-house: - Direct materials: $1 - Direct labor: $10 - Variable manufacturing overhead: $5 Total variable cost per unit = $1 + $10 + $5 = $16 per unit

Now, let's calculate the total variable cost if Carmen purchases 5,000 units of A2 from The Don Company at $22 per unit: Total purchase cost = 5,000 units * $22 per unit = $110,000

If Carmen opts to manufacture the units in-house, the total variable cost for 5,000 units would be: Total variable manufacturing cost = 5,000 units * $16 per unit = $80,000

Carmen also mentions that $60,000 of fixed manufacturing overhead would be eliminated if the A2 units are purchased externally. We have to consider this cost saving in our analysis.

To see the net impact, we calculate the difference between purchasing the units and manufacturing them in-house, taking the overhead savings into account: Differential cost of purchasing (external) = Total purchase cost - Total variable manufacturing cost - Fixed manufacturing overhead savings Differential cost of purchasing (external) = $110,000 - $80,000 - $60,000 Differential cost of purchasing (external) = -$30,000

Since the differential cost is negative, it implies that purchasing the units from The Don Company would cost $30,000 less than manufacturing them in-house when considering the variable costs and the eliminated fixed overhead.

So, based on this differential analysis, Carmen should accept the offer from The Don Company to purchase the 5,000 units of A2 for $22 per unit, as it is the more cost-effective option.