Question

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 13,000 units of the module per year for $26.00 each. The following information pertains to MSi's production of the control modules: $14 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 fixed 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. 2. Should MSI buy the modules from MLC or continue to make them? 3-a. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $37,000 in annual profit. Recompute the difference in cost between making and buying under this scenario. 3-b. Does this change your recommendation to MSI?

Answer 1

1
	Per unit		Total 13000 units
	Make	Buy	Make	Buy
Direct materials	14		182000
Direct labor	6		78000
Variable manufacturing overhead	5		65000
Purchase cost		26		338000
Total			325000	338000
Difference in cost = $13000 (325000-338000)
2
Continue to Make them
3a
	Make	Buy
Total cost	325000	338000
Opportunity cost	37000
Total relevant cost	362000	338000
Difference in cost = $24000 (362000-338000)
3b
Yes, now the recommendation is Buy