Make$-$or$-$Buy Decision

Pizana Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $$18$ per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of $40\%$ of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Line Item Description Amount

Direct materials $$5\mathrm{.}00$

Direct labor $8\mathrm{.}00$

Factory overhead $(40\%$ of direct labor$)3\mathrm{.}20$

Total cost per unit $$16\mathrm{.}20$

If Pizana 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.

Question Content Area

a$.$ Prepare a differential analysis dated May $31$ to determine whether the company should make $($Alternative $1)$ or buy $($Alternative $2)$ the carrying case. If an amount is zero, enter $"0".$ If required, round your answers to two decimal places.

Differential Analysis

Make $($Alt$.1)$ or Buy $($Alt$.2)$ Carrying Case

May $31$

Line Item Description Make Carrying Case

$($Alternative $1)$ Buy Carrying Case

$($Alternative $2)$ Differential Effects

$($Alternative $2)$

Unit costs:

Purchase price $Purchase price

$Purchase price

$Purchase price

Direct materials Direct materials

Direct materials

Direct materials

Direct labor Direct labor

Direct labor

Direct labor

Variable factory overhead Variable factory overhead

Variable factory overhead

Variable factory overhead

Fixed factory overhead Fixed factory overhead

Fixed factory overhead

Fixed factory overhead

Total unit costs $Total unit costs

$Total unit costs

$Total unit costs

Question Content Area

b$.$ Assuming there were no better alternative uses for the spare capacity, it would

to manufacture the carrying cases. Fixed factory overhead is

to this decision.