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 $207 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 16,000 monitors	Unit cost
Direct materials	$	1,920,000	$	120
Direct labor		1,056,000		66
Variable factory overhead		544,000		34
Fixed manufacturing overhead		400,000		25
Fixed non-manufacturing overhead		720,000		45
	$	4,640,000	$	290

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 $47,700, but non-manufacturing costs would remain the same if monitors are bought.

Fill in the differential analysis.

Make or Buy Decisions Differential Analysis Re no rt Purchase price of 15,0DD monitors Differential cost to make: Direct materials 5: Differential income {loss} from making monitors 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 Net differential (increase)/decrease in cost, six year total