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 23,000 units of the module per year for $24.00 each. The following information pertains to MSI’s production of the control modules:        

Direct materials	$	13
Direct labor		4
Variable manufacturing overhead		6
Fixed manufacturing overhead		4
Total cost per unit	$	27

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.

Difference in cost: ___________



2. Should MSI buy the modules from MLC or continue to make them?

	Buy or
	Make

3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $45,000 in annual profit. Recompute the difference in cost between making and buying under this scenario.

Difference in Cost: ________



3-b. Does this change your recommendation to MSI?

	Yes
	No

Answer 1

Ans 1 Relevant cost to make
Direct materials	$13
Direct labor	4
Variable manufacturing overhead	6
	$23
Cost to buy	$24
Difference in cost per unit	$1
(23-24)
Difference in cost ($1*23000)	$23,000
It will cost less by $23000 if we make rather buy
ans 2
It should continue to make as the relevant cost is less
than to buy from outside.
Ans 3
Ans 1 Relevant cost to make
Direct materials		$13
Direct labor		4
Variable manufacturing overhead		6
		$23
Cost to buy	$24
Less: Additional profit generate (45000/23000)	$1.96	$22.04
Difference in cost ($1*23000)	22000
(23*23000)-((24*23000)-45000))
It will cost less by $22000 if we buy rather make
ans 3b
Yes now the company should buy
Note minus sig has not been used in the answer