Question

Montel Firm is considering whether to outsource the manufacture of subcomponent JXY. The accounting department provides the following cost information for manufacturing 10,500 units of subcomponent JXY per month.

Direct materials costs		$38,500
Direct labour costs		31,100
Variable overhead		14,800
Fixed overhead*		12,000

*Fixed overhead includes $4,200 supervisor’s salary.

International Firm agrees to supply Montel with 10,500 units per month for a total cost of $135,500. If subcomponent JXY is outsourced, Montel will be able to increase the production and sales of its final product by 1,000 units per month; the product is sold for $115 per unit and its average variable costs per unit are $75. 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)
Manufacturing overheadTotal annual costCost of good soldDirect materialsDirect labourVariable overheadFixed overheadPurchase priceOpportunity cost		$		$		$
Fixed overheadVariable overheadTotal annual costDirect labourPurchase priceOpportunity costManufacturing overheadDirect materialsCost of good sold
Variable overheadDirect materialsFixed overheadOpportunity costCost of good soldDirect labourManufacturing overheadPurchase priceTotal annual cost
Opportunity costManufacturing overheadDirect materialsPurchase priceTotal annual costCost of good soldDirect labourVariable overheadFixed overhead
Opportunity costPurchase priceTotal annual costVariable overheadCost of good soldDirect materialsDirect labourManufacturing overheadFixed overhead
Manufacturing overheadDirect materialsVariable overheadTotal annual costCost of good soldDirect labourPurchase priceFixed overheadOpportunity cost
Direct materialsDirect labourOpportunity costVariable overheadPurchase priceCost of good soldManufacturing overheadFixed overheadTotal 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 buymake the units.

Would the decision be different if Montel has the opportunity to produce and sell 2,300 units with the facilities currently being used to manufacture subcomponent JXY?

Answer 1