(a) Montel firm is considering whether to outsource the manufacture of subcompon

ID: 2433233 • Letter: #

Question

(a)

Montel firm is considering whether to outsource the manufacture of subcomponent JXY. The accounting department provides the following cost information for manufacturing 11,400 units of the subcomponent JXY per month.
Direct materials costs $41,000 Direct labour costs 31,000 Variable overhead 15,700 Fixed overhead* 13,200
*Fixed overhead includes $4,200 supervisor’s salary.

International Firm agrees to supply Montel with 11,400 units per month for a total cost of $138,200. If the subcomponent JXY is outsourced, Montel will be able to increase the production and sales of its final product by 1,160 units per month, which is sold for $100 per unit and its average variable costs per unit are $65. The supervisor’s salary will be eliminated if subcomponent JXY is outsourced.

Explanation / Answer

Make

Buy

Incremental
Costs

Direct Material

41000

(41000)

Direct Labour

31000

(31000)

Variable O/H

15700

(15700)

Fixed O/H

13200

9000

(4200)

Purchase Price

138200

Opportunity Cost (1160 units) * ($100 - $65)

40600

(40600)

141500

147200

5700