MSI is considering outsourcing the production of the handheld control module use

Question

MSI is considering outsourcing the production of the handheld control module used with some of its products. The company has received a bid from Monte Legend Co (MLC) to produce 10,000 units of the module per year for $16 each. The following information pertains to MSI's production of the control modules Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit $ 9 $18 MSI 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 MSI has no specific use in mind for the space that is currently dedicated to the control module production. Required 1. Compute the difference in cost between making and buying the control module Difference in Cost 2. Should MSI buy the modules from MLC or continue to make them? O Buy Make 3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $35,000 in annual profit. Recompute the difference in cost between making and buying under this scenario. Difference in Cost 3-b. Does this change your recommendation to MSI? O Yes 0

Explanation / Answer

1). If MSI outsources the production then only variable cost is avoidable and fixed cost will still incur.
Cost when Making:-
Total Unit Cost = $18
Units = 10000
Total cost of making = $18 * 10000 = $180000

Cost when Outsourced:-
Total Purchase cost per unit = $16
Fixed Cost per unit = $3
Total unit cost = $19
Total cost of product when outsourced = $19* 10000 = $190000

Difference in Cost = $180000 - $190000 = $10000

2). MSI should continue to make them because the cost of making is low.

3). Supposing vacant space can generate $35000 revenue.

Cost of Making = $180000
Add: Opportunity cost of space utilisation = $35000
Total cost of making = $215000

Cost of Outsourcing = $160000 (10000 * $16)

Difference in Cost = $215000 - $160000 = $55000

3b).Yes the recommendation is changed. Now MSI should outsource the production.

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