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 20,000 monitors from an outside supplier for 204 per unit. One of the company's cost-accounting interns prepared the following schedule of Zee-Drive's cost to produce 20,000 monitors: Total cost of producing 20,000 monitors: Unit cost: Direct materials:2,280,000 (114 per unit), Direct labor:1,340,000 (67 per unit), Variable factory overhead:660,000 (33 per unit), Fixed manufacturing overhead:540,000 (27 per unit), Fixed non-manufacturing overhead:860,000 (43 per unit). 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 by51,800, but non-manufacturing costs would remain the same if monitors are bought. Fill in the differential analysis. Make or buy decisions differential analysis report: Purchase price of 20,000 monitors: fill in the blank, Differential cost to make:fill in the blank.

Answer 1

The differential analysis for Zee-Drive Ltd's make or buy decision should consider the total purchase cost against the relevant costs of making, which include direct materials, avoidable direct labor, and variable overhead, minus saved fixed manufacturing overhead.

Step-by-step explanation:

In the decision to make or buy monitors, Zee-Drive Ltd must perform a differential analysis, considering only the relevant costs and savings associated with each option. The purchase price of 20,000 monitors is $204 per unit, amounting to $4,080,000 in total. To calculate the differential cost to make the monitors, we should include the direct materials ($114 per unit), the direct labor ($67 per unit which is avoidable if bought), and variable factory overhead ($33 per unit which is also avoidable if bought). Fixed manufacturing overhead will be reduced by $51,800 if the monitors are bought, which should be considered in the cost to make as well. However, fixed non-manufacturing overhead costs are not relevant. The revised total cost to make the monitors is the sum of the direct materials, direct labor, and variable factory overhead minus the reduced fixed manufacturing overhead.