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 DescriptionAmount

Direct materials$28.00

Direct labor18.00

Factory overhead (42% of direct labor)7.56

Total cost per unit$53.56

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 15% 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 price

Direct materialsDirect materialsDirect materialsDirect materials

Direct laborDirect laborDirect laborDirect labor

Variable factory overheadVariable factory overheadVariable factory overheadVariable factory overhead

Fixed factory overheadFixed factory overheadFixed factory overheadFixed 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

be advisablenot be advisable

to manufacture the carrying cases. Fixed factory overhead is

relevantirrelevant

to this decision.