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 25,000 units of the module per year for $22.00 each. The following information pertains to MSI's production of the control modules: $13 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit $29 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 ifference in Cost 2. Should MSI buy the modules from MLC or continue to make them? Make Buy 3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $41,000 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? No Yes Hints References eBook & Resourc es Hint #1

Explanation / Answer

Question Answer Explanation 1 $1 The cost difference is $1 i.e. make ($29) and buy ($22+$8 fixed cost) 2 Make Buying cost will be higher 3-a $7 The cost difference now is $ 7 i.e,($29-$22) 3-b Yes Now, buying will be better option

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