Question

Zouar Computer Corporation currently manufactures the disk drives that it uses in its computers. The costs to produce 5,000 of these disk drives last year were as follows: Cost per drive Direct materials $12 Direct labor 2 Variable manufacturing overhead 5 Fixed manufacturing overhead 7 Total $26 Kidal Electronics has offered to provide Zouar with all of its disk drive needs for $27 per drive. If Zouar accepts this offer, Zouar will be able to use the freed up space to generate an additional $40,000 of income each year to produce more of its computer keyboards. Only $3 per drive of the fixed manufacturing overhead cost above could be avoided. Direct labor is an avoidable cost in this decision. Based on this information, would Zouar be financially better off making the drives or buying the drives and by how much?

Answer 1

Net profit $15,000

Step-by-step explanation:

Total Cost Saving and Benefit of Buying outside

Total Cost Other than fixed cost $95,000

($12 + $2 + $5) × 5,000

Fixed cost $15,000

($3 × 5,000)

Additional income $40,000

Total saving $1,50,000

Cost Of buying $1,35,000

($27 × 5,000)

Net Benefit $15,000

($150,000 - $135,000)