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 25,000 units of the module per year for $22.00 each. The following information pertains to MSI’s production of the control modules:        

Direct materials	$	13
Direct labor		6
Variable manufacturing overhead		2
Fixed manufacturing overhead		8
Total cost per unit	$	29

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.

3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $41,000 in annual profit. Recompute the difference in cost between making and buying under this scenario.

Answer 1

Ans-3-a- Differential analysis:

	Make	Buy
Direct material (25,000units *$13)	325,000
Direct labour (25,000units *$6)	150,000
Variable manufacturing overhead (25,000units *$2)	50,000
Fxed manufacturing overhead (25,000units *$8)	200,000	200,000
Opportunity cost	41,000
Purchase cost (25,000units *$22)		550,000
Total Cost	766,000	750,000

Difference in cost=$766,000-$750,000=$16,000

Kindly give thumbsup if my answer is right.....Thanks!!!