33 26 44 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 $214 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 $ 2,074,000 $122 Direct labor 1,275,000 75 Variable factory overhead 561,000 Fixed manufacturing overhead 442,000 Fixed non-manufacturing overhead 748,000 $ 5,100,000 $300 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 $53,700, 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 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 $450,900 Current accumulated depreciation 309,000 Estimated annual variable manufacturing costs for machine 71,550 Estimated selling price of machine 193,800 Estimated remaining useful life (in years) 6 New Machine: $788,700 Purchase cost Estimated annual variable manufacturing costs for machine 44,800 Estimated residual value 0 Estimated useful life (in years) 6 Fill in the differential analysis. Replace or Keep Decision Differential Analysis Report 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 III oli Net differential (increase)/decrease in cost, six year total