Question

Montel Firm is considering whether to outsource the manufacture of subcomponent JXY. The accounting department provides the following cost information for manufacturing 10,900 units of subcomponent JXY per month.

Direct materials costs		$39,200
Direct labour costs		30,800
Variable overhead		14,100
Fixed overhead*		13,600

*Fixed overhead includes $4,900 supervisor’s salary.

International Firm agrees to supply Montel with 10,900 units per month for a total cost of $131,700. If subcomponent JXY is outsourced, Montel will be able to increase the production and sales of its final product by 1,200 units per month; the product is sold for $115 per unit and its average variable costs per unit are $85. The supervisor’s salary will be eliminated if subcomponent JXY is outsourced.

Prepare an incremental analysis for subcomponent JXY. (If an amount reduces the incremental costs then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

		Make		Buy		Incremental Costs (Savings)
Purchase priceDirect labourOpportunity costManufacturing overheadTotal annual costCost of good soldDirect materialsVariable overheadFixed overhead		$		$		$
Opportunity costManufacturing overheadDirect materialsDirect labourFixed overheadVariable overheadTotal annual costPurchase priceCost of good sold
Variable overheadDirect labourPurchase priceFixed overheadOpportunity costCost of good soldTotal annual costManufacturing overheadDirect materials
Variable overheadCost of good soldPurchase priceDirect labourOpportunity costManufacturing overheadTotal annual costDirect materialsFixed overhead
Cost of good soldPurchase priceOpportunity costDirect materialsTotal annual costManufacturing overheadDirect labourVariable overheadFixed overhead
Purchase priceManufacturing overheadTotal annual costDirect labourDirect materialsCost of good soldVariable overheadFixed overheadOpportunity cost
Direct materialsOpportunity costManufacturing overheadVariable overheadCost of good soldDirect labourFixed overheadPurchase priceTotal annual cost		$		$		$

Based on your analysis, what decision should management make? Management should decide to buymake JXY as it would cost an additional $ if they were to makebuy the units.

Would the decision be different if Montel has the opportunity to produce and sell 2,000 units with the facilities currently being used to manufacture subcomponent JXY?

Answer 1