Devon Firm is considering whether to outsource the manufacture of subcomponent X

Question

Devon Firm is considering whether to outsource the manufacture of subcomponent XYZ. The accounting department provides the following cost information for manufacturing 10,000 units of the subcomponent XYZ per month. Direct Material Costs $42,000 Direct Labour Costs $33,000 Variable Overhead $14,000 Fixed Overhead* $12,000 *Fixed overhead includes $5,000 Supervisor’s salary. Stadia Firm agrees to supply Devon with 10,000 units per month for a total cost of $125,000. If the subcomponent XYZ is outsourced, Devon will be able to increase the production and sales of its final product by 1,000 units per month, which is sold for $105 per unit and its average variable costs per unit are $73. The supervisor’s salary will be eliminated if subcomponent XYZ is outsourced. Required: a. Prepare an incremental analysis for the subcomponent XYZ. Your analysis should have columns for (1) Make the subcomponent XYZ, (2) Buy the subcomponent XYZ, and (3) Incremental Costs (Savings) b. Based on your analysis, what decision should management make? c. Would the decision be different if Devon has the opportunity to produce 2,000 units with the facilities currently being used to manufacture the subcomponent XYZ? Show calculations.

Explanation / Answer

a.

b. Management should buy the component XYZ from Stadia Firm since it would result in additional savings of $1000.

c. No

Incremental Analysis Make the subcomponent XYZ Buy the subcomponent XYZ Incremental Costs (Savings) Direct materials 42000 0 -42000 Direct labor 33000 0 -33000 Variable overhead 14000 0 -14000 Fixed overhead 12000 7000 -5000 Purchase price 0 125000 125000 Opportunity cost of additional contribution 32000 0 -32000 133000 132000 -1000

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.