Question

Make or Buy Decision: Zee-Drive Ltd. is a computer manufacturer. One of the items they make is monitors. Zee-Drive has the opportunity to purchase 18,000 monitors from an outside supplier for $206 per unit. One of the company's cost-accounting interns prepared the following schedule of Zee-Drive's cost to produce 18,000 monitors: Total cost of producing 18,000 monitors Unit cost Direct materials $2,106,000 Direct labor 1,296,000 Variable factory overhead 504,000 Fixed manufacturing overhead 540,000 Fixed non-manufacturing overhead 810,000 $ 5,256,000 $ 292 You are asked to look over the intern's estimate before the information is shared with members of management who will decide to continue to make the monitors or buy them. The company's controller believes that the estimate may be incorrect because it includes costs that are not relevant. If Zee-Drive buys the monitors, the direct labor force currently employed in producing the monitors will be terminated and there would be no termination costs incurred. There are no materials on hand and no commitments to suppliers to purchase materials, so all materials would need to be purchased to make the monitors. Variable overheads are avoidable if monitors are bought. Fixed manufacturing overhead costs would be reduced by $58,800, but non-manufacturing costs would remain the same if monitors are bought. Fill in the differential analysis.

Answer 1

Purchase price of 18,000 monitors (18,000*$206)		$   3,708,000
Differential cost to make
Direct materials	$   2,106,000
Direct labor	$   1,296,000
Overhead ($504,000+540,000-58,800)	$      985,200	$   4,387,200
Differential income (loss)for making monitors		$    (679,200)

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