Question

Benson ProSystems needs a new signal conditioner module for a large process control system it is designing. Current market conditions will support annual sales of 1,000 systems. Engineers estimate the following unit manufacturing costs for the module:

Direct materials		$25
Direct labor		18
Variable manufacturing overhead		7
		$50

Engineers estimate that 25 weeks of development work will be needed to develop, test, and verify the new design. Engineering resources (personnel and lab) to complete the development will cost $3,000 per week. If the engineers don’t work on this project, they will be assigned to another.

Longan Devices has a module that is quite similar to the one Benson needs. Longan can modify the device to suit Benson in just four weeks, and has offered to supply it to Benson at a price of $60 per unit.

(a)

Should Benson go forward with its design of the new module, or should it accept Longan’s offer?

Answer 1

Cost incurred for developing the module internally is $75000 (25 weeks x $3000 per week) and time involved is 25 weeks whereas if purchased from Logan then the cost is $60000 (1000 units x $60 per unit) and time involved is 4 weeks. Based on the cost and time involved it is advisable for the Benson ProSystems to accept the Longan's offer and should not go forward with its design of the new module.