Zee-Drive Ltd. is a computer manufacturer. One of the items they make is monitors. Zee-Drive has the opportunity to purchase 16,400 monitors from an outside supplier for $205 per unit. One of the company's cost-accounting interns prepared the following schedule of Zee-Drive's cost to produce 16,400 monitors:

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. If an amount box does not require an entry, leave it blank or enter "0".

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Solution
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 $431,300
Current accumulated depreciation 329,400
Estimated annual variable manufacturing costs for machine 72,250
Estimated selling price of machine 190,300
Estimated remaining useful life (in years) 6
New Machine:
Purchase cost $802,300
Estimated annual variable manufacturing costs for machine 43,350
Estimated residual value 0
Estimated useful life (in years) 6
Select the relevant or irrelevant information below:
Annual variable costs of old machine - Select your answer -RelevantIrrelevantCorrect 1 of Item 3
Selling price of old machine - Select your answer -RelevantIrrelevantCorrect 2 of Item 3
Matching lives - Select your answer -Relevant Irrelevant Correct 3 of Item 3
Purchase price of new machine - Select your answer -Relevant Irrelevant Correct 4 of Item 3
Accumulated depreciation of old machine - Select your answer -Relevant Irrelevant Correct 5 of Item 3
Fill in the differential analysis. If an amount box does not require an entry, leave it blank or enter "0".

Transcribed Image Text:

Total cost of producing 16,400 monitors Unit cost Direct materials 1,918,800 117 Direct labor 1,066,000 65 Variable factory overhead 590,400 36 Fixed manufacturing 492,000 30 overhead Fixed non-manufacturing 672,400 41 overhead $ 289 4,739,600 %24 Difference costs/(savings) of buying 16,400 Cost of Cost to producing 16,400 purchase 16,400 monitors monitors monitors Direct materials Direct labor Variable factory overhead - Select your answer -Fixed manufacturing overheadFixed non-manufacturing overheadRedundancy costsCorrect 12 of Item 2 - Select your answer -Outside purchase costsFixed non-manufacturing overheadMonitors in finished goods inventoryCorrect 16 of Item 2 Total costs