Make$-$or$-$Buy Decision

Pizana Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $$58$ 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 $$26\mathrm{.}00$

Direct labor $20\mathrm{.}00$

Factory overhead $(40\%$ of direct labor$)8\mathrm{.}00$

Total cost per unit $$54\mathrm{.}00$

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 $12\%$ 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. Round your answers to two decimal places. If an amount is zero, enter $"0".$

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

$0$

$Purchase price

$58$

$Purchase price

$58$

Direct materials Direct materials

$26$

Direct materials

$0$

Direct materials

$26$

Direct labor Direct labor

$20$

Direct labor

$0$

Direct labor

$20$

Variable factory overhead Variable factory overhead

$2\mathrm{.}4$

Variable factory overhead

$0$

Variable factory overhead

$2\mathrm{.}4$

Fixed factory overhead Fixed factory overhead

$0$

Fixed factory overhead

$0$

Fixed factory overhead

$0$

Total unit costs $Total unit costs

$48\mathrm{.}4$

$Total unit costs

$58$

$Total unit costs

$9\mathrm{.}6$

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