88) Zouar Computer Corp. currently manufactures the disk drives that it uses in

Question

88) Zouar Computer Corp. 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 s 12 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total 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 S40.000 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) $60,000 better to make B) S20,000 better to buy C) $35,000 better to buy D) S15,000 better to buy

Explanation / Answer

Answer:-

If the 5000 units of disk drives are purchase from outside supplier then loss in purchase will be=($27 per unit -$22 per unit)*5000 units =$25000

But product is purchase from outside supplier then Zouar Computer Corp. will be use the freed up space to generate an additional $40000 of income each year.

Hence net benefit will be =Annual rental amount-Loss in purchase from supplier

=$40000-$25000 =$15000

Hence Zouar would be financially better off buying the drives and by $15000.

Explanation:- 1)-In fixed manufacturing overhead, avoidable only $3 per drive will be taken for decision making, it is considered as a avoidable cost and relevant for decision making.

2)- Fixed manufacturing overhead $4 per drive (ie- $7 per unit-$3 per unit= $4 per unit) are unavoidable fixed cost hence not considered in relevant cost, it is continue to occur whether to manufacture the product or buy the product.

Zouar Computer Corp. Statement of Comparative cost Manufaturing Amount Purchase from outside Supplier Amount Per unit $ Per unit $ Direct Material                12.00 Purchase Cost               27.00 Direct Labor                  2.00 Variable manufacturing overhead 5.00 Avoidable Fixed manufacturingOverhead                  3.00 Total Manufaturing cost                22.00 Total Purchase cost               27.00

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