Question

Roth company manufactures a fantasy part for use in its production. when 10,000 units are produced, the costs per fantasy are: direct materials $0.80 direct manufacturing labor $2.80 variable manufacturing overhead $1.20 fixed manufacturing overhead $1.60 total $6.40 Spinella Company has offered to sell to Roth company 10,000 units of the fantasy part for $6.00 per unit. the plant facilities at Roth could be used to manufacture another item at a savings of $9,000 if Roth accepts the offer to outsource. in addition, $1.00 per unit of fixed manufacturing overhead on the original fantasy unit would be eliminated. Required: prepare appropriate incremental analysis to support your recommendation that Roth is to 1) outsource the production of the part or 2) continue to make the part itself. Be sure to include any non-quantitative factors that would be relevant to Roth's decision.

Answer 1

a) Cost if In house manufactured
Units	10000
DM	0.8
DL	2.8
V.Ohs	1.2
F.ohs	1.6
	6.4
Total Cost	64000
B) If Production Outsourced
Savings in existing production (64000-60000)				4000
Profit from another item produced				9000
Fixed o/h incurred ((1-0.6)*10000)				-6000
if outsourced
Net savings				7000

Thus, option (b) is better as it results in additional savings of $7000 over existing cost. But only detriment is outsourced quality should be maintained to retain the client