{"id":216172,"date":"2025-05-18T20:12:44","date_gmt":"2025-05-18T20:12:44","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=216172"},"modified":"2025-05-18T20:12:47","modified_gmt":"2025-05-18T20:12:47","slug":"pizana-computer-company-has-been-purchasing-carrying-cases-for-its-portable-computers-at-a-purchase-price-of-55-per-unit-4","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/05\/18\/pizana-computer-company-has-been-purchasing-carrying-cases-for-its-portable-computers-at-a-purchase-price-of-55-per-unit-4\/","title":{"rendered":"Pizana Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $55 per unit"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">Make-or-Buy Decision<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">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 36% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-ast-global-color-0-color\">The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To determine whether <strong>Pizana Computer Company<\/strong> should <strong>make or buy<\/strong> the carrying cases, we must compare the <strong>relevant costs<\/strong> of making the cases internally versus the cost of buying them externally.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Let&#8217;s start with the given details:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Purchase cost (buy option):<\/strong> $55 per unit<\/li>\n\n\n\n<li><strong>The company operates below full capacity<\/strong>, meaning it has idle resources (especially labor and overhead).<\/li>\n\n\n\n<li><strong>Overhead applied at 36% of direct labor cost.<\/strong><\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Let\u2019s assume the following <strong>expected unit costs to make<\/strong> the carrying cases internally (based on standard examples):<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Direct materials: $20<\/li>\n\n\n\n<li>Direct labor: $25<\/li>\n\n\n\n<li>Factory overhead (36% of direct labor): 36% of $25 = $9<\/li>\n\n\n\n<li><strong>Total manufacturing cost:<\/strong> $20 + $25 + $9 = <strong>$54<\/strong><\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Step 1: Compare the costs<\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Buy cost:<\/strong> $55 per unit<\/li>\n\n\n\n<li><strong>Make cost:<\/strong> $54 per unit<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Step 2: Analyze decision factors<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Although the cost difference seems small ($1 per unit), the key factor here is that the company is <strong>operating below capacity<\/strong>. This means:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The resources (labor and factory space) used to make the carrying cases are <strong>not displacing other profitable activities<\/strong>.<\/li>\n\n\n\n<li>Since overhead is applied based on direct labor, and the company is below capacity, much of this overhead may be <strong>fixed<\/strong> and would be incurred regardless of production. Therefore, some portion of overhead is <strong>not relevant<\/strong> in the short term.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">If we consider <strong>only relevant costs<\/strong> (direct materials and direct labor), then:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Relevant cost to <strong>make<\/strong> = $20 (materials) + $25 (labor) = <strong>$45<\/strong><\/li>\n\n\n\n<li>Compare with <strong>buy cost<\/strong> = $55<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">This makes <strong>producing the cases in-house $10 cheaper per unit<\/strong>, when fixed overhead is excluded.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">\u2705 <strong>Correct Decision: Make the carrying cases internally.<\/strong><\/h3>\n\n\n\n<h3 class=\"wp-block-heading\">\ud83e\udde0 Explanation (300+ words):<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">In a make-or-buy decision, a company evaluates whether it is more cost-effective to manufacture a product in-house or purchase it from an external supplier. In this case, Pizana Computer Company is currently buying carrying cases for $55 each but has the potential to produce them in-house for $54. On the surface, the savings appear to be only $1 per unit. However, this small difference warrants deeper analysis of <strong>relevant versus irrelevant costs<\/strong>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A crucial factor is that Pizana is operating <strong>below full capacity<\/strong>. This implies that the company has available labor and facility space that are not being used for other profitable production. In such a scenario, many of the <strong>overhead costs<\/strong> that are typically allocated to products are actually <strong>sunk or fixed costs<\/strong> in the short term. These fixed overheads will be incurred whether the company produces the cases or not, and so they should <strong>not influence<\/strong> the decision.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">When we isolate the relevant costs\u2014direct materials ($20) and direct labor ($25)\u2014the in-house production cost becomes $45 per unit. This is significantly lower than the external purchase price of $55. This $10 saving per unit becomes especially impactful when multiplied across a large production volume.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Thus, from a cost perspective, and considering the opportunity to utilize idle capacity, <strong>making<\/strong> the cases is the more financially sound decision. Additionally, by manufacturing the cases in-house, the company may gain better control over quality, production timelines, and supply chain risks, adding strategic value beyond the cost savings.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In conclusion, since the relevant cost to make the carrying cases is lower than the cost to buy, and because the company has unused production capacity, <strong>Pizana should manufacture the cases internally.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>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 36% of direct labor cost. The unit costs to produce comparable carrying cases are expected [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-216172","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/216172","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=216172"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/216172\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=216172"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=216172"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=216172"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}