3. Differential analysis: Make or buy Quantum-Drive, a computer manufacturer, cu

Question

3. Differential analysis: Make or buy

Quantum-Drive, a computer manufacturer, currently purchases monitors from an outside company at a price of $173 per unit. While the quality of thhe monitors has always been ver high, Quantum-Drive's management believes it might be possible to produce a superior monitor internally at a cost lower than $173. One of the company's cost-accounting interns prepared the following estimate of the per-unit manufacturing cost:

You are asked to look over the intern's estimate before the information is shared with members of management, who will decide to purchase monitors or manufacture them. The company's controller believes that the estimate may be incorrect, because Quantum-Drive has excess manufacturing capacity to produce the monitors without incurring additional fixed factory overhead.

Please complete the following two questions:

A. What per-unit manufacturing cost should be used in determining whether Quantum-Drive should purchase the monitors from an outside company or manufacture them internally?

B. What is the per-unit cost saving associated with Quantum-Drive purchasing the monitors from an outside company rather than making them?

Direct materials $97 Direct labor 57 Variable factory overhead 29 Fixed factory overhead 50 $233

Explanation / Answer

Solution:

Make Buy Direct Materials 97 Purchase Price 173 Direct Labor 57 Variable factory overhead 29 Fixed factory overhead Sunk cost Total Manufacturing cost per unit 183 173 Therefore, per unit manufacturing cost is $ 183

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