Devon Firm is considering whether to outsource the manufacture of subcomponent X
ID: 2454605 • Letter: D
Question
Devon Firm is considering whether to outsource the manufacture of subcomponent XYZ. The accounting department provides the following cost information for manufacturing 10,000 units of the subcomponent XYZ per month.
Direct Material Costs $40,000 Direct Labour Costs $30,000 Variable Overhead $15,000 Fixed Overhead* $14,000 *Fixed overhead includes $5,000 Supervisor’s salary.
Stadia Firm agrees to supply Devon with 10,000 units per month for a total cost of $120,000. If the subcomponent XYZ is outsourced, Devon will be able to increase the production and sales of its final product by 1,000 units per month, which is sold for $100 per unit and its average variable costs per unit are $75. The supervisor’s salary will be eliminated if subcomponent XYZ is outsourced.
Required:
a. Prepare an incremental analysis for the subcomponent XYZ. Your analysis should have columns for (1) Make the subcomponent XYZ, (2) Buy the subcomponent XYZ, and (3) Incremental Costs (Savings) b. Based on your analysis, what decision should management make? c. Would the decision be different if Devon has the opportunity to produce 2,000 units with the facilities currently being used to manufacture the subcomponent XYZ? Show calculations.
Explanation / Answer
Solution:
(1). Incremental Analysis:
(B). Ok Buy the Subcomponent XYZ.
Particulaes Alternative -A Alternative-B Increase/Decrease Net Income Sales 1,04,000 1,00,000 4,000 Less: Variable Expencess Direct Material 40,000 Direct Labour 30,000 Variable Overheads 15,000 Total Ovariable Overhead 85,000 75,000 10,000 Contribution Margin 19,000 25,000 (6,000) Less: Fixed Expencess 19,000 0 19,000 Net Income 0 25,000 (25,000)Related Questions
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