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 14,000 units of the module per year for $18.00 each. The following information pertains to MSI's production of the control modules Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit 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. in Cost 2. Should MSI buy the modules from MLC or continue to make them? Make Buy 3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $42,000 in annual profit. Recompute the difference in cost between making and buying under this scenario. in Cost

Explanation / Answer

1)Since fixed cost is unavoidable If units are purchased from outside Thus it is irrelevant in decision making

Variable cost of manufactuing (since avoidable ,savings) =8+6+2= 16

Purchase cost :18

Difference in cost :14000[18-16 ]

              = 28000

2)MSI Should make it internally as there is an incremental cost of 28000 on purchase form outside supplier

3a)Total manufacturing cost = 16*14000= 224000

Total purchase cost: [18*14000]-42000 = 210000

Difference in cost : 224000-210000 = 14000

3b)MSI should purchase it from outside as it will result in saving of 14000

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