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 12,000 units of the module per year for $19.00 each. The following information pertains to MSI's production of the control modules: $10 Direct materials Direct labor ariable manufacturing overhead Fixed manufacturing overhead Total cost per unit $22 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 erence in Cost 2. Should MSI buy the modules from MLC or continue to make them? Buy Make 3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $26,000 in annual profit. Recompute the difference in cost between making and buying under this scenario. erence in Cost

Explanation / Answer

1) Cost of making the control module = 12000 X $22 = 264000

Cost of buying the control module = 12000 X $19 + 12000 X $4 (fixed cost ) = 276000

Difference between Making and buying the control module = 276000 - 264000 = 12000

2) It is better to make the control module because cost of making is less than buying the control module by 12000

3) Cost of making the control module = 12000 X 22 + 26000 ( profit foregone) = 290000

Cost of buying the control module = 12000 X 19 + 12000 X $4 = 276000

Difference in cost = 290000 - 276000 = 14000

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