E8-27A (similar to) Question Help Savoy Enterprises manufactures one of the comp
ID: 2545942 • Letter: E
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E8-27A (similar to) Question Help Savoy Enterprises manufactures one of the components used to assemble its This current cost per unit is based on the following calculations main company product. Specialty Products, Inc., has offered to make the component at a cost of $13.00 per unit. Savoy Enterprises' current cost is $15.25 per unit of the component, based on the 105,000 components that Savoy Enterprises currently produces. EEB (Click the icon to view the information) outsourced However, the freed capacity could be used to build a new This new product would be expected to generate $34,000 of contribution marg Requirement 1. If Savoy Enterprises outsources the manufacturing of the component, will operating income increase or decrease? By how much? (Enter a "O" for 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 1.417,500 $ 183, 750 1.365,000 Total cost of 105.000 components 1.548.700 34000 1.514,700 34 000 1,601.250 Nat cost sed o e elimil 3 pemaining 0Explanation / Answer
Requirement 1 :
Incremental Analysis: Outsourcing Decision :
Fixed manufacturing overhead costs are unavoidable, and therefore are not relevant to decision making. They would be incurred regardless of the decision to outsource or make.
If Savoy Enterprises outsources the component to an outside supplier, operating income will increase by $ 86,500.
Requirement 2 :
The maximum price that Savoy would be willing to pay = $ 1,451,500 / 105,000 = $ 13.82
Make Component Outsource Component Difference Variable Costs Direct Materials $ 603,750 $ (603,750) Direct Labor 761,250 (761,250) Variable Manufacturing Overhead 52,500 (52,500) Opportunity Cost ( Contribution Margin Foregone) 34,000 (34,000) Purchase Cost 1,365,000 1,365,000 Totals 1,451,500 1,365,000 (86,500)Related Questions
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