FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Make-or-Buy Decision

Pizana Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $55 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 Description Amount
Direct materials $27.00
Direct labor 21.00
Factory overhead (42% of direct labor) 8.82
Total cost per unit $56.82

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.

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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 AnalysisMake (Alt. 1) or Buy (Alt. 2) Carrying CaseMay 31
Line Item Description Make Carrying Case
(Alternative 1)
Buy Carrying Case
(Alternative 2)
Differential Effects
(Alternative 2)
Unit costs:      
Purchase price $Purchase price $Purchase price $Purchase price
Direct materials Direct materials Direct materials Direct materials
Direct labor Direct labor Direct labor Direct labor
Variable factory overhead Variable factory overhead Variable factory overhead Variable factory overhead
Fixed factory overhead Fixed factory overhead Fixed factory overhead Fixed factory overhead
Total unit costs $Total unit costs $Total unit costs $Total unit costs
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