Question

Check my work Required information [The following information applies to the questions displayed below.) points Morning Sky, Inc. (MSI), manufactures and sells computer games. The company has several product lines based on the age range of the target market. MSI sells both individual games as well as packaged sets. All games are in CD format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, MSI has developed and manufactured all the CDs itself as well as the accessories and packaging for all of its products. eBook Hint Print The gaming market has traditionally been targeted at teenagers and young adults; however, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. MSI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry. The company currently has excess capacity and is investigating several possible ways to improve profitability. References 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 20,000 units of the module per year for $20.00 each. The following information pertains to MSI's production of the control modules: $10 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit 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:

Answer 1

1
	Per unit		Total 20000 units
	Make	Buy	Make	Buy
Direct materials	10		200000
Direct labor	6		120000
Variable manufacturing overhead	3		60000
Purchase cost		20		400000
Total			380000	400000
Difference in cost = 20000 (380000-400000)
2
Make, as cost of making is less
3a
	Make	Buy
Total cost	380000	400000
Opportunity cost	44000
Total relevant cost	424000	400000
Difference in cost = 24000 (424000-400000)
3b
Yes, now the recommendation is Buy