Savoy Enterprises manufactures one of the components used to assemble its This c

Question

Savoy Enterprises manufactures one of the components used to assemble its This current cost per unit is based on the following c main company product. Specialty Products, Inc., has offered to make the per unit of the component based on the 105,000 components that Savoy Read the Click the icon to view the information.) at a cost of $13.00 per unit. Savoy Enterprises' current cost is $15.25 None of Savoy Enterprises' fixed costs will be eliminated if the com outsourced However, the freed capacity could be used to build a ne This new product would be expected to generate $34,000 of contribu per year Requirement 1.If Savoy Enterprises outsources the manufacturing of the component, will operating income increase or decrease? By how much? (Enter any zero balances. Use a minus sign or parentheses in the Difference column when the cost to make exceeds the cost to buy) Incremental Analysis Outsourcing Decision Make Outsource Component Component Difference Variable costs S 1,417,500 S 1,365,0005 52,500 183,750 1601250][ 1.601.250 [ 154870 34,000 Total cost of 105,000 components 34,000 1.514.7001 Net cost ed o Enter any humber in the eait fields and then click Check Answer elimi 3emng produ oi@

Explanation / Answer

1) Differential analysis :

Net operating income increase by (1451500-1365000) = 86500

b) Maximum price per unit = 1451500/105000 = 13.82 per unit

Make Buy Variable cost (13.50*105000) 1417500 Opportunity cost 34000 Purchase cost (105000*13) 1365000 Total 1451500 1365000

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