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 16,000 monitors from an outside supplier for $212 per unit. One of the company's cost-accounting interns prepared the following schedule of Zee-Drive's cost to produce 16,000 monitors:

Total cost of producing

15,000 monitor Unit cost

Direct materials$1,936000 $121

Direct labor 1,120000 70

Variable factory overhead 544,000 34

Fixed manufacturing overhead 480,000 30

Fixed non-manufacturing overhead656,000 41

$4,736,000 $296

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 $40,000, 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 16,000 monitors $______

Differential cost to make:Direct materials $______

Direct labor $_____

Overhead Differential income (loss) from making monitors $______