Question

Zee-Drive Ltd. is a computer manufacturer. One of the items they make is monitors. Zee-Drive has the opportunity to purchase 17,000 monitors from an outside supplier for $200 per unit. One of the company's cost-accounting interns prepared the following schedule of Zee-Drive's cost to produce 17,000 monitors: Total cost of producing 17,000 monitors Unit cost Direct materials $ 1,921,000 $ 113 Direct labor 1,105,000 65 Variable factory overhead 578,000 34 Fixed manufacturing overhead 459,000 27 Fixed non-manufacturing overhead 697,000 41 $ 4,760,000 $ 280 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 $40,100, 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 17,000 monitors $ Differential cost to make: Direct materials $ Direct labor Overhead Differential income (loss) from making monitors. What is the overhead cost?

Answer 1

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		Make	Buy	Differential
Purchase Price of 17,000 Monitors	17,000*$200		$   3,400,000	$      (3,400,000)
Cost to Make:
Direct Material		$   1,921,000	$                   -	$        1,921,000
Direct Labor		$   1,105,000	$                   -	$        1,105,000
Variable Factory Overheads		$       578,000	$                   -	$            578,000
Fixed Manufacturing Overheads		$       459,000	$       418,900	$              40,100
Fixed Non-Manufacturing Overheads		$       697,000	$       697,000	$                       -
		$   4,760,000	$   4,515,900	$            244,100
Since Cost to buy is lower by $244,100 than cost to make, should be bought
Overhead Cost:
		Make	Buy
Variable Factory Overheads		$       578,000	$                   -
Fixed Manufacturing Overheads		$       459,000	$       418,900
Fixed Non-Manufacturing Overheads		$       697,000	$       697,000
		$   1,734,000	$   1,115,900