Pnok Company has been purchasing a component, Part Q, for $18.90 a unit. Pnok is

Question

Pnok Company has been purchasing a component, Part Q, for $18.90 a unit. Pnok is currently operating at 70% of capacity and no significant increase in production is anticipated in the near future. The cost of manufacturing a unit of Part Q, determined by absorption costing methods, is estimated as follows:

Direct materials $11.25
Direct labor 4.50
Variable factory overhead 1.12
Fixed factory overhead 3.15
Total $20.02

Prepare a differential analysis report, dated March 12 of the current year, on the decision to make or buy Part Q.

Explanation / Answer

Make or buy decision:PrticularsCost of manufacturingCost of buyingIncremental costVariable costs:Direct material11.25011.25Direct labor4.504.5Variable overhead1.1201.12Total variable costs16.87016.87Fixed costs:Factory overhead3.153.150Total fixed costs3.153.150Cost of buying compressors18.918.9Tota

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