Question

Marco Enterprises manufactures one of the components used to assemble its main company product. Specialty​ Products, Inc., has offered to make the component at a cost of

$13.10

per unit.

Marco

​Enterprises' current cost is

$14.75

per unit of the​component, based on the

105,000

components that

Marco

Enterprises currently produces. Read the requirements

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.

This current cost per unit is based on the following​ calculations:

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​(Click the icon to view the​ information.)None of

Marco

​Enterprises' fixed costs will be eliminated if the component is outsourced.​ However, the freed capacity could be used to build a new product. This new product would be expected to generate

$33,000

of contribution margin per year.

Requirement 1. If

MarcoMarco

Enterprises outsources the manufacturing of the​ component, will operating income increase or​ decrease? By how​ much? ​(Enter a​ "0" for any zero balances. Use a minus sign or parentheses in the Difference column when the cost to make exceeds the cost to​ buy.)

Incremental Analysis	Make	Outsource
Outsourcing Decision	Component	Component	Difference
Variable costs
Plus: Fixed costs
Total cost of 105,000 components
Less: Profit from another product
Net cost

Enter any number in the edit fields and then click Check Answer.

Requirements

1.	If Marco Enterprises outsources the manufacturing of the​ component, will operating income increase or​ decrease? By how​ much?
2.	What is the maximum price per unit MarcoMarco Enterprises would be willing to pay if it outsources the​ component?

Data Table

Direct material per unit	$3.75
Direct labor per unit	7.75
Variable manufacturing overhead per unit	0.75
Fixed manufacturing overhead per unit	2.50
Total manufacturing costs per unit	$14.75

Answer 1

Incremental Analysis	Make	Outsource
Outsourcing Decision	Component	Component	Difference
Variable costs	1286250	1375500	89250
	[105000*(3.75+7.75+0.75)]	[105000*13.10]
Plus: Fixed costs	262500	0	-262500
Total cost of 105,000 components	1548750	1375500	-173250
Less: Profit from another product	0	33000	33000
Net cost	1548750	1342500	-206250
ANSWERS:
Operating income will increase by $206,250, as the net cost of outsourcing is lower by that amount.
Maximum price it can pay = Costs saved by outsourcing-Contribution that can be earned from (1548750-33000)/105000 =	$14.44