MSI is considering Outsourcing the production of the handheld control module use
ID: 2554903 • Letter: M
Question
MSI is considering Outsourcing the production of the handheld control module used with some of its products.
MSl 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 17,000 units of the module per year for $32.00 each. The following informati pertains to MSI's production of the control modules Direct materials $18 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit 536 MSI has determined that it could eliminate all variable costs if the control modufes were produced externally, but none of the fixed overhead is avoidable. At this time, MSi he no specific use in mind for the space that is currently dedicatedi to the control module production Required: 1. Compute the difference in cost between making and buying the control module Difference in CostExplanation / Answer
1.
Making
Buying
Direct material
$ 18
-
Direct labor
$ 6
-
Variable manufacturing over head
$ 7
-
Purchasing cost
-
$ 32
Cost per unit
$ 31
$ 32
Total cost for 17,000 units
$ 527,000
$ 544,000
Cost different between buying and making = $ 544,000 - $ 527,000 = $ 17,000
Fixed cost is unavoidable and is irrelevant in decision making.
2.
MSI should continue to make moulds as it is cheaper than purchasing.
3-a.
Making
Buying
Direct material
$ 18
Direct labor
$ 6
Variable manufacturing over head
$ 7
Purchasing cost
$ 32
Cost per unit
$ 31
$ 32
Total cost for 17,000 units
$ 527,000
$ 544,000
Opportunity cost
$ (43,000)
Total cost
$ 527,000
$ 501,000
Cost different between making and buying = $ 527,000 - $ 501,000 = $ 26,000
3-b.
Yes, the decision will change as buying is cheaper than making.
***Answered first four sub parts.
Making
Buying
Direct material
$ 18
-
Direct labor
$ 6
-
Variable manufacturing over head
$ 7
-
Purchasing cost
-
$ 32
Cost per unit
$ 31
$ 32
Total cost for 17,000 units
$ 527,000
$ 544,000
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