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 18,000 units of the module per year for $25.00 each. The following information pertains to MSI's production of the control modules: $19 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: 1. Compute the difference in cost between making and buying the control module. 2. Should MSI buy the modules from MLC or continue to make them? 3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $28,000 in annual profit. Recompute the difference in cost between making and buying under this scenario. 3-b. Does this change your recommendation to MSI? Complete this question by entering your answers in the tabs below. Req 1 Reg 2 Reg 3A Req 3B Compute the difference in cost between making and buying the control module. Difference in Cost

Answer 1

1
	Per unit		Total 18000 units
	Make	Buy	Make	Buy
Direct materials	10		180000
Direct labor	7		126000
Variable manufacturing overhead	7		126000
Purchase cost		25		450000
Total			432000	450000
Difference in cost = 18000 (432000-450000)
2
Make, as cost of making is less
3a
	Make	Buy
Total cost	432000	450000
Opportunity cost	28000
Total relevant cost	460000	450000
Difference in cost = 10000 (460000-450000)
3b
Yes, now the recommendation is Buy