Problem III. (20 Points).

A company is planning to introduce a new portable computer to its existing product line. Management must decide whether to make the computer case or buy it from an outside supplier. The lowest outside price is $90. If the case is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $130,000. The company will also need to rent a new production facility at $200,000 a year. At 20,000 cases per year, a preliminary analysis of production costs shows the following:

Per case

Direct materials.......................................................... $ 40.00

Direct labor................................................................. 32.00

Variable overhead....................................................... 10.00

Equipment depreciation.............................................. 6.50

Building rental ........................................................... 10.00

Allocated fixed overhead............................................ 7.50

Total cost.................................................................... $106.00

Required:

(1) Determine whether the company should make the cases or buy them from the outside supplier. (16 Points).

(2) What other factors, besides cost, should the company consider? (4 Points).

Problem 4. (20 Points).

A company has just received a special, one-time order for 1,000 units. Producing the order will have no effect on the production and sales of other units. The buyer's name will be stamped on each unit, at a cost of $1.50 per unit. Normal cost data, excluding stamping, follows:

Direct materials $ 10 per unit

Direct labor.. 16 per unit

Variable overhead 4 per unit

Allocated fixed overhead. 12 per unit

Allocated fixed selling expense 8 per unit

Prepare an analysis that indicates the selling price per unit this company will require to earn $3,000 on the order.