Question

You make refrigerators. Currently, you manufacture compressors for your refrigerators in-house. An outside supplier has offered to sell you equivalent compressors at a wholesale price of $85 per unit. You need 1,000 compressors per month. The internal production costs per compressor are as follows: cost per unit direct materials $30 direct labor $30 variable overhead $20 fixed overhead $20 total $100 If you outsource the production of compressors (the buy option) in the short term, how will this choice affect your costs and profit? First, compute variable costs under MAKE versus BUY MAKE BUY unit VC total VC OP If you outsource (BUY), the incremental revenue, costs, and profit are: how much each amount changes if you outsource incremental revenue Incremental VC Incremental CM Incremental FC Incremental profit Enter negative amounts with a minus sign, le, -1,000 not ($1,000). Should you outsource? YES - outsourcing reduces costs by $5,000

Answer 1

Solution :

(1) Variable Costs :

	Make	Buy
Unit VC	$ 80*	$ 85
Total VC (1,000 * Unit VC)	$ 80,000	$ 85,000

*VC Cost in Make = DM + DL + VOH = $ 30 + $ 30 + $ 20 = $ 80

(2) Incremental Analysis Statement :

Incremental Revenue	$ 0	Explanation
Incremental VC	$ 5,000*	No Change in Sales
Incremental CM	- $ 5,000	VC cost higher in Outsourcing
Incremental FC	$ 0	No Addition in Fixed Cost
Incremental Profit	- $ 5,000

* Please enter negatve figure if table does not accept positive figure as this is to be reduced.

(3) Should you Outsource ? No - outsourcing reduces profit by $5,000.

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