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 Direct labor $13 4 6 Variable manufacturing overhead Fixed manufacturing overhead 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? O Make OBuy 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 scenarlo. Difference in Cost 3-b. Does this change your recommendation to MSI? ONo O Yes

Answer 1

1
	Per unit		Total 23000 units
	Make	Buy	Make	Buy
Direct materials	13		299000
Direct labor	4		92000
Variable manufacturing overhead	6		138000
Purchase cost		24		552000
Total			529000	552000
Difference in cost = $23000 (529000-552000)
2
Make, as cost is lower
3a
	Make	Buy
Total cost	529000	552000
Opportunity cost	45000
Total relevant cost	574000	552000
Difference in cost = $22000 (574000-552000)
3b
Yes, now the recommendation is Buy