Y&U Company purchases reading lamps and produces student desks. It currently produces 2,000 student desks per year, operating at normal capacity, which is about 80% of full capacity. Each student desk has a reading lamp as one of its components. Y&U purchases reading lamps at $400 each, but the company is considering using the excess capacity to manufacture the reading lamps instead. The manufacturing cost per reading lamp would be $160 for materials, $130 for direct labour, and $180 for overhead. The $180 overhead is based on $120,000 of annual fixed overhead that is allocated using normal capacity.

The president of Y&U has come to you for advice. "It would cost me $470 to make the reading lamp," she says, "but only $400 to buy them. Should I continue buying them or have I missed something?"

Instructions

(a) Prepare a per-unit analysis of the differential costs. Briefly explain whether Y&U should make or buy the reading lamps.

(b) Identify three qualitative factors that should be considered by Y&U in this make-or-buy decision.