Zouar Computer Corporation Currently Manufactures the Disk Drives That It

question 195

Multiple Choice

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:
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

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Definitions:

Output Units

A measure of production that represents the total quantity of goods and services produced over a specific period of time.

ATC

Average Total Cost, a firm's total cost divided by its total output.

Demand

The quantity of a specific good or service that consumers are willing and able to purchase at different price levels, at a given time.

Marginal Cost Curve

A graphical representation showing how the cost to produce one additional unit varies with the quantity of output produced, typically upward sloping due to increasing marginal costs.