A Company Is Planning to Introduce a New Portable Computer

A company is planning to introduce a new portable computer to its existing product line. Management must decide whether to make the computer case or buy it from an outside supplier. The lowest outside price is $90. If the case is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $130,000. The company will also need to rent a new production facility at $200,000 a year. At 20,000 cases per year, a preliminary analysis of production costs shows the following:
Per Case
Direct materials $ 40.00
Direct labor 32.00
Variable overhead 10.00
Equipment depreciation 6.50
Building rental 10.00
Allocated fixed overhead 7.50
Total cost $106.00
Required:
(1) Determine whether the company should make the cases or buy them from the outside supplier.
(2) What other factors, besides cost, should the company consider?

Correct Answer:

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(1)Incremental cost to make the cases:
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