Question

9. Blast-It-Out-Musical Instruments manufactured 6,250 electronic pickups that were used in its guitars and 4 and 5 string basses and incurred the following costs: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $30,500 15,000 10,000 20,000 $75,500 Muffled Assemblies has offered to sell the same electronic pickup to Blast-It-Out for $13.75 per unit. The fixed manufacturing overhead of Blast It Out consists mainly of depreciation on the equipment used to manufacture the electronic pickup and would not be reduced if the electronic pick up was purchased from Muffled. If the electronic pickup is purchased from Muffled, Blast It Out has the opportunity to use the factory equipment to produce a 6-string bass which is not currently in its product line and which is estimated to have a contribution margin of $25,750. Prepare an analysis and recommend what Blast-It-Out should do. Show all calculations and explain your recommendation.

Answer 1

Differential analysis

	Make	Buy
Direct material	30500
Direct labor	15000
Variable overhead	10000
Opportunity Cost	25750
Purchases cost (6250*13.75)		85937.50
Total relevant cost	81250	85937.50

Company should make the subassembalies