Question

E7-6 Analyzing Make-or-Buy Decision [LO 7-2, 7-4 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 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit $13 6 8 $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. Required: 1. Compute the difference in cost between making and buying the control module Difeince in Cost

Answer 1

ANSWER = 3 (A)
	DIFFERENTAL ANALYSIS
	ANALYSIS OF PROPOSAL
		MAKE	BUY	DIFFERENTIAL EFFECT ON INCOME
	Purchase cost of Component , Part Q	$                             -	$                             22	$                                   -22
	Direct Materials	$                            13	$                              -	$                                     13
	Direct Labor	$                               6	$                              -	$                                       6
	Variable Factory Overhead	$                               2	$                              -	$                                       2
	Fixed Factory Overhead	$                             -	$                              -	$                                      -
	Total	$                            21	$                             22	$                                      -1
	Making relevant cost	$                            21
	Buying cost	$                            22
	Difference in Cost = (25,000 units X $ 1)	$                    25,000
ANSWER = 3 (B)
	No, not recommended for change because purchasing is higer than make
	Answer = No