MSI Has Been Approached 65 × Required Information 1 a bid from Monte Legend Co.
ID: 2570760 • Letter: M
Question
MSI Has Been Approached 65 × Required Information 1 a bid from Monte Legend Co. (ML 12,000 units of the module per year for The following information applies to the questions displayed below Morning Sky, Inc. (MS0, manufactures and sells computer games. The company has several product lines based on the age range of the target market. MSI sells both individual games as well as packaged sets. All games are in CD format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, MSI has developed and manufactured all the CDs itself as well as the accessories and packaging for all of its products. Direct labor Fixed manuf Total cost per unit that it could elimini ad is avoidable. At this time, MS in mind for the space that is currently de Required The gaming market has traditionally been targeted at teenagers and young adults however, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. MSI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry The company currently has excess capacity and is investigating several possible ways to improve profitability. MSI buy the es from MLC or continue to make them? 4Explanation / Answer
Morning Sky Inc
Determination of relevant costs of making –
Direct materials $10 per unit
Direct labor $6
Variable overhead $2
Total relevant cost per unit $18
Cost of buying $19 per unit
Difference in cost of making and buying the control module = ($1)
The cost of buying is higher than cost of making by $1.
Note:
The unit fixed cost of $4 is not relevant, as the same is an unavoidable cost. The fixed cost is incurred regardless of the decision of making or buying and hence does not form part of the relevant cost.
Based on the given information, the company’s cost of making is lower ($18 per unit) than cost of buying ($19). Hence, cost of buying is higher than making and so the company is recommended to opt to MAKE the control module.
3a. recomputaiton of the difference in cost between making and buying:
The increase in annual profit from utilization of space currently used for control modules = $26,000
So, when the company opts to MAKE the component, MSI would loss the increase in annual profit of $26,000. Hence, $26,000 is opportunity cost.
Cost of making 12,000 units of modules at $18 per unit = $216,000
Add: opportunity cost $26,000
Total cost of MAKING 12,000 units of control modules $242,000.
Cost of BUYING 12,000 units of control modules $19 x 12,000 = $228,000
Excess cost of MAKING $14,000
Hence, difference in cost of making and buying $14,000
3b. Based on the above calculations in 3a the recommendation would change to ‘BUY’ the control module.
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