Make or Buy Decision: Zee-Drive Ltd. is a computer manufacturer. One of the item

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 19,000 monitors from an outside supplier for $206 per unit. One of the company 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 Direct labor Variable factory overhead Fixed manufacturing overhead Fixed non-manufacturing overhead $2,223,000 1,349,000 627,000 532,000 779,000 $5,510,000 $117 71 28 41 $290 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 $46,800, but non-manufacturing costs would remain the same if monitors are bought. Fill in the differential analysis.

Explanation / Answer

Differential analysis;

Make or buy decisions Differential analysis report Purchase price of 19000 monitors 3914000 Differential cost to make: Direct materials 2223000 Direct labour 1349000 Overhead (627000+485200) 1112200 -4684200 Differential income (loss) from making monitors -770200

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