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 22,000 units of the module per year for $26.00 each. The following information pertains to MSI’s production of the control modules:

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.

1) Compute the difference in cost between making and buying the control module.

2) Should MSI buy the modules from MLC or continue to make them?

3) Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $40,000 in annual profit. Recompute the difference in cost between making and buying under this scenario.

4) Does this change your reccomendation to MSI?

$ 13 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit $ 31

Explanation / Answer

1) Differential analysis :

Difference in cost = 682000-704000 = 22000

2) Continue to make them

3) Differential analysis :

Difference in cost = 722000-704000 = 18000

4) Company should buy the control module.

Make Buy Direct material 286000 Direct labour 154000 Variable manufacturing overhead 110000 Fixed manufacturing overhead 132000 132000 Purchase cost 572000 Total cost 682000 704000

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.