Make$-$or$-$Buy Decision

Pizana Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $$57$ per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of $42\%$ of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Line Item DescriptionAmountDirect materials$$27\mathrm{.}00$Direct labor$21\mathrm{.}00$Factory overhead $(42\%$ of direct labor$)8\mathrm{.}82$Total cost per unit$$56\mathrm{.}82$

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 $13\%$ 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 DescriptionMake Carrying Case

$($Alternative $1)$Buy Carrying Case

$($Alternative $2)$Differential Effects

$($Alternative $2)$Unit costs:Purchase price$Purchase price$Purchase price$Purchase priceDirect materialsDirect materialsDirect materialsDirect materialsDirect laborDirect laborDirect laborDirect laborVariable factory overheadVariable factory overheadVariable factory overheadVariable factory overheadFixed factory overheadFixed factory overheadFixed factory overheadFixed factory overheadTotal unit costs$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

be advisablenot be advisable

to manufacture the carrying cases. Fixed factory overhead is

relevantirrelevant

to this decision.