Question

I thought that I am to subtract the fixed manufacturing overhead reduction cost of 50900 from the 513000 (462100) for the overhead. The answer keeps saying I am wrong. How do I come up with the correct #?

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 19,000 monitors from an outside supplier for $217 per unit. One of the company's cost-accounting interns prepared the following schedule of Zee-Drive's cost to produce 19,000 monitors: Total cost of producing 19,000 monitors Unit cost Direct materials $2,318,000 Direct labor 1,387,000 Variable factory overhead 646,000 Fixed manufacturing overhead 513,000 Fixed non-manufacturing overhead 741,000 $ 5,605,000 5295 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 $50,900, but non-manufacturing costs would remain the same if monitors are bought. Fill in the differential analysis. Make or Buy Decisions Differential Analysis Report S 4,123,000 Purchase price of 19,000 monitors Differential cost to make: Direct materials s -2,318,000 -1,387,000 Direct labor Overhead Differential income (loss) from making monitors

Answer 1

Make or Buy Decisions
Differential Analysis Report
Purchase price of 19,000 monitors [ 217 * 19000 ]		4123000
Differential cost to make :
Direct materials	-2318000
Direct labor	-1387000
Overhead [ 646000 + 50900 ]	-595100	-4300100
Differential income (loss) from making monitors		-177100

Note : All avoidable costs are taken in the calculation, means if the monitors are purchase these costs will no longer be incurred.

If Zee-Drive Ltd. Purchases the monitors it will not incur the direct materials, direct labor, variable overhead and fixed overhead of 50900.