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 $203 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 costDirect materials$1,989,000$117Direct labor1,258,00074Variable factory overhead476,00028Fixed manufacturing overhead425,00025Fixed non-manufacturing overhead663,00039$4,811,000$283

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 $40,700, but non-manufacturing costs would remain the same if monitors are bought.

Fill in the differential analysis.

Make or Buy Decisions

Differential Analysis ReportPurchase price of 17,000 monitors$Differential cost to make:Direct materials$Direct laborOverheadDifferential income (loss) from making monitors$