Question

6. 200 points Required information E7-6 Analyzing Make-or-Buy Decision [LO 7-2, 7-4) 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 10,000 units of the module per year for $16.00 each. The following information pertains to MSi's production of the control modules 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 fored 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 Difference in cost

Answer 1

Solution 1:

Particulars	Make	Buy	Difference in Cost
Direct materials	$90,000.00	$0.00	$90,000.00
Direct labor	$30,000.00	$0.00	$30,000.00
Variable overhead	$30,000.00	$0.00	$30,000.00
Fixed overhead	$70,000.00	$70,000.00	$0.00
Purchase price	$0.00	$160,000.00	-$160,000.00
Total annual costs	$220,000.00	$230,000.00	-$10,000.00

Solution 2:

MSI should continue to make

Solution 3a:

Particulars	Make	Buy	Difference in Cost
Direct materials	$90,000.00	$0.00	$90,000.00
Direct labor	$30,000.00	$0.00	$30,000.00
Variable overhead	$30,000.00	$0.00	$30,000.00
Fixed overhead	$70,000.00	$70,000.00	$0.00
Purchase price	$0.00	$160,000.00	-$160,000.00
Opportunity cost	$0.00	-$36,000.00	$36,000.00
Total annual costs	$220,000.00	$194,000.00	$26,000.00

Solution 3b:

Yes, recommendation will be changed as now MSI should buy.