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 18,000 units of the module per year for $25.00 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.

Direct materials $ 10 Direct labor 7 Variable manufacturing overhead 7 Fixed manufacturing overhead 4 Total cost per unit $ 28 ect for 1210 x D MSI ls Considering at X C Not secure ezto.mhed tpx? 0.9202631561558313 1523717594802 2. Should MSI buy the modules from MLC or continue to make them? O Buy Make MSI space currently used for the modules could be utilized by a new product ine that would generate $28,000 in anual profe Recompute the dfference n coat batween macn and buying under this scenario Difference in Cost26,000 to MSIP No

Explanation / Answer

3 Per unit Total Make Buy Make Buy Direct materials 10 180000 Direct labor 7 126000 Variable manufacturing overhead 7 126000 Purchase cost 25 450000 Opportunity cost 28000 Total 460000 450000 Difference in cost = $10000 (460000-450000)

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