In: Accounting
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 17,000 monitors from an outside supplier for $208 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 |
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Direct materials | $ | 2,040,000 | $ | 120 |
Direct labor | 1,173,000 | 69 | ||
Variable factory overhead | 561,000 | 33 | ||
Fixed manufacturing overhead | 459,000 | 27 | ||
Fixed non-manufacturing overhead | 663,000 | 39 | ||
$ | 4,896,000 | $ | 288 |
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 $51,400, but non-manufacturing costs would remain the same if monitors are bought.
Fill in the differential analysis.
Make or Buy Decisions Differential Analysis Report |
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Purchase price of 17,000 monitors | $ | |
Differential cost to make: | ||
Direct materials | $ | |
Direct labor | ||
Overhead | ||
Differential income (loss) from making monitors | $ |
Feedback
Enter only the differential relevant costs in the appropriate space and calculate differential income or loss. The challenge is in determining differential overhead.
Keep or Replace Machine:
Skiles Coporation is a manufacturer of classic rocking chairs. The company has been using a particular sanding and finishing machine for over 10 years and believes that it may be time to replace the machine. The company is trying to decide whether replacing the old machine is a wise economic decision. The company's controller pulled together the following information on the old machine and the new possible replacement machine.
Old Machine: | |
Original cost | $458,100 |
Current accumulated depreciation | 333,300 |
Estimated annual variable manufacturing costs for machine | 70,800 |
Estimated selling price of machine | 161,200 |
Estimated remaining useful life (in years) | 6 |
New Machine: | |
Purchase cost | $810,400 |
Estimated annual variable manufacturing costs for machine | 47,500 |
Estimated residual value | 0 |
Estimated useful life (in years) | 6 |
Select the relevant or irrelevant information below:
Annual variable costs of old machine | Relevant |
Selling price of old machine | Relevant |
Matching lives | Relevant |
Purchase price of new machine | Relevant |
Accumulated depreciation of old machine | Irrelevant |
Fill in the differential analysis.
Replace or Keep Decision Differential Analysis Report |
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Cost of replacing old machine: | ||
Annual differential decrease in cost | $ | |
x number of years | ||
Total differential decrease in cost | ||
Proceeds from sale of present machine | $ | |
Cost of new machine | ||
Net differential (increase)/decrease in cost, six year total | $ |
Differential Analysis Report | ||
Purchase Price | 3,536,000 | |
Differential Cost | ||
Direct Material | 2,040,000 | |
Direct labor | 1,173,000 | |
Overhead | 612,400 | 3,825,400 |
Differential income from making | (289,400) | |
Replace or Keep | ||
Cost of replacing old machine: | ||
Annual differential decrease in cost | 23,300 | |
x number of years | 6 | |
Total differential decrease in cost | 139,800 | |
Proceeds from sale of present machine | 161,200 | |
Cost of new machine | 810,400 | |
Net differential (increase)/decrease in cost, six year total | (509,400) | |
Annual variable costs of old machine | Relevant | |
Selling price of old machine | Relevant | |
Matching lives | Relevant | |
Purchase price of new machine | Relevant | |
Accumulated depreciation of old machine | Irrelevant |