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 16,000 units of the module per year for $36.00 each. The following information pertains to MSI's production of the control modules: $19 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit $37 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

Explanation / Answer

Make Buy Per unit Total Direct materials 19 304000 Direct labor 9 144000 Variable manufacturing overhead 7 112000 Purchase cost 36 576000 Total cost 560000 576000 Difference in cost=576000-560000 = $16000

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