Question

Zouar Computer Corporation currently manufactures the disk drives that it uses in its computers. The costs to produce 5,000 of these disk drives last year were as follows:
Cost per drive
Direct materials $12
Direct labor 2
Variable manufacturing overhead 5
Fixed manufacturing overhead 7
Total $26
Kidal Electronics has offered to provide Zouar with all of its disk drive needs for $27 per drive. If Zouar accepts this offer, Zouar will be able to use the freed up space to generate an additional $40,000 of income each year to produce more of its computer keyboards. Only $3 per drive of the fixed manufacturing overhead cost above could be avoided. Direct labor is an avoidable cost in this decision. Based on this information, would Zouar be financially better off making the drives or buying the drives and by how much?
a. $15,000 better to buy.
b. $20,000 better to buy.
c. $35,000 better to buy.
d. $60,000 better to make.

Answer 1

Answer:

Zouar Computer Corporation

a. $15,000 better to buy.

Explanation:

a) Data and Calculations:

Production capacity = 5,000

Cost per drive

Direct materials                            $12

Direct labor                                      2

Variable manufacturing overhead 5  $19

Fixed manufacturing overhead      7

Total                                            $26

Avoidable costs:

Direct materials                            $12

Direct labor                                      2

Variable manufacturing overhead 5

Fixed manufacturing overhead      3

Avoidable opportunity cost            8 ($40,000/5,000)

Total avoidable costs                 $30

It will be financially better off buying the drives:

                                      Make        Buy             Difference

Total avoidable costs $150,000   $135,000   $15,000 ($150,000 - $135,000)