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 same of its praducts. The company has received a bid from Monte Legend Co. (MLC) to produce 27,000 units of the module per year for $33.00 each. The following information pertains to MSI's production of the control modules: 19 Direct labor Varable manufacturing overhead Fixed manufacturing overhead Total cost per unit $36 MSI has determined that it could eliminate all variable costs if the control modules were produced exteally, 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 Required: 1 . Compute the difference in cost between making and buying the control module Difference in Cost 2. Should MSI buy the modules from MLC or continue to make them? Make 3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $31,000 in annual profit. Recompute the difference in cost between making and buying under this scenario. in Cost

Explanation / Answer

1 Per unit Total Make Buy Make Buy Direct materials 19 513000 Direct labor 9 243000 Variable manufacturing overhead 4 108000 Purchase cost 33 891000 Total cost 864000 891000 Difference in cost=891000-864000=$27000 2 Make 3 Make Buy Total cost 864000 891000 Opportunity cost 31000 Total relevant cost 895000 891000 Difference in cost=895000-891000=$5000

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