Electronic Playground, Inc. (EPI) manufactures and sells computer games for chil

Question

Electronic Playground, Inc. (EPI) manufactures and sells computer games for children. The company has several product lines based on the age range of the target market and whether the games are marketed as educational or entertainment. EPI sells both individual games as well as packaged sets. All games are in CD format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, EPI has developed and manufactured all CDs itself as well as the accessories and packaging for all of its products.

The gaming market has traditionally been targeted at teenagers and young adults. However, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. EPI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry. The company currently has excess capacity and is investigating several possible ways to improve profitability.

EPI is considering outsourcing the production of the handheld control module used with some of its products. The company has received a bid from Control Freak Co. (CFC) to produce 10,300 units of the module per year for $17.3 each. The following information pertains to EPI's production of the control modules.

$15  

EPI has determined that it could eliminate all variable costs if the control modules were produced externally, but none of the fixed overhead is avoidable. At this time, EPI has no specific use in mind for the space that is currently dedicated to the control module production.

Determine the impact this decision will have on EPI's annual income. (Omit the "$" sign in your response.)

The gaming market has traditionally been targeted at teenagers and young adults. However, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. EPI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry. The company currently has excess capacity and is investigating several possible ways to improve profitability.

Explanation / Answer

                                                                      Increase /      
                                    Make           Buy        (Decrease)
Purchase cost                               $178,190     ($178,190)  
Direct Materials           $82,400                           $82,400
Direct labor                 $24,720                           $24,720
Variable manuf. OH   $25,750                           $25,750
Fixed costs                       0                             Irrelevant   
Total cost              $132,870         $178,190   $45,320   


Differential cost of making versus buying      $45,320 favors making

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