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 13,000 units of the module per year for $26.00 each. The following information pertains to MSI's production of the control modules $14 6 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit S30 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 Required 1. Compute the difference in cost between making and buying the control module ifference in Cost 2. Should MSI buy the modules from MLC or continue to make them? Buy O Make 3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $37,000 in annual profit. Recompute the difference in cost between making and buying under this scenario. ifference in Cost 3-b. Does this change your recommendation to MSI? O No O Yes

Explanation / Answer

Make Buy Direct materials 182000 Direct labor 78000 Variable maufacturing overhead 65000 Purchase cost 338000 Total cost 325000 338000 Difference in cost=$13000(338000-32500) 2 Make 3a Make Buy Direct materials 182000 Direct labor 78000 Variable maufacturing overhead 65000 Purchase cost 338000 Annual profit 37000 Total cost 362000 338000 Difference in cost=$24000(362000-338000) 3b Yes

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