Zee-Drive Ltd. is a computer manufacturer. One of the items they make is monitors. Zee-Drive has the opportunity to purchase 19,000 monitors from an outside supplier for $210 per unit. One of the company's cost-accounting interns prepared the following schedule of Zee-Drive's cost to produce 19,000 monitors:

	Total cost of producing 19,000 monitors		Unit cost
Direct materials	$	2,261,000	$	119
Direct labor		1,349,000		71
Variable factory overhead		627,000		33
Fixed manufacturing overhead		570,000		30
Fixed non-manufacturing overhead		741,000		39
	$	5,548,000	$	292

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 $56,700, 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 19,000 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	$441,000
Current accumulated depreciation	331,300
Estimated annual variable manufacturing costs for machine	71,950
Estimated selling price of machine	165,200
Estimated remaining useful life (in years)	6
New Machine:
Purchase cost	$797,300
Estimated annual variable manufacturing costs for machine	49,300
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

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

Answer rating: 100% (QA)

Make or Buy Decision Differential Analysis Report Purchase price of 19000 monitors 210unit Different... View the full answer