Question

Marco Enterprises manufactures one of the components used to assemble its main company product. Specialty Products, Inc., has offered to make the component at a cost of

$13.10
per unit.
Marco
Enterprises' current cost is
$14.75
per unit of thecomponent, based on the
105,000
components that
Marco
Enterprises currently produces. Read the requirements
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.
This current cost per unit is based on the following calculations:
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(Click the icon to view the information.)None of
Marco
Enterprises' fixed costs will be eliminated if the component is outsourced. However, the freed capacity could be used to build a new product. This new product would be expected to generate
$33,000
of contribution margin per year.
Requirement 1. If
MarcoMarco
Enterprises outsources the manufacturing of the component, will operating income increase or decrease? By how much? (Enter a 0 for any zero balances. Use a minus sign or parentheses in the Difference column when the cost to make exceeds the cost to buy.)
Incremental Analysis Make Outsource Outsourcing Decision Component Component Difference
Variable costs Plus: Fixed costs Total cost of 105,000 components Less: Profit from another product Net cost Enter any number in the edit fields and then click Check Answer.
Requirements
1. If
Marco
Enterprises outsources the manufacturing of the component, will operating income increase or decrease? By how much?
2. What is the maximum price per unit
MarcoMarco
Enterprises would be willing to pay if it outsources the component?
Data Table
Direct material per unit $3.75
Direct labor per unit 7.75
Variable manufacturing overhead per unit 0.75
Fixed manufacturing overhead per unit 2.50
Total manufacturing costs per unit $14.75

Answer 1

If Marco Enterprises outsources the manufacturing of the component, their operating income will decrease by $1.65 per unit.

Step-by-step explanation:

To determine if Marco Enterprises should outsource the manufacturing of the component, we need to compare the current cost of producing the component internally with the cost of outsourcing it to Specialty Products, Inc. The current cost per unit for Marco Enterprises is $14.75. If they outsource, the cost per unit will be $13.10. To calculate the difference in operating income, we need to consider the variable costs and the profit from another product.

1. Variable costs for Marco Enterprises per unit: Direct material ($3.75) + Direct labor ($7.75) + Variable manufacturing overhead ($0.75) = $12.25
2. Total cost of 105,000 components internally: $14.75 * 105,000 = $1,543,750
3. Net cost: Total cost - Profit from another product = $1,543,750 - $33,000 = $1,510,750

If Marco Enterprises outsources the manufacturing of the component, the net cost will be $1,510,750. This is a decrease in operating income compared to the current cost, so operating income will decrease. The decrease in operating income will be $14.75 - $13.10 = $1.65 per unit.

Answer 2

1. If Marco Enterprises outsources the manufacturing of the component, the operating income will increase by $173,250.
2. Marco Enterprises would be willing to pay a maximum price of $0.3143 per unit if it outsources the component.

Step-by-step explanation:

1. If Marco Enterprises outsources the manufacturing of the component, the operating income will increase. To determine the amount of increase, we need to compare the current cost per unit with the cost per unit offered by Specialty Products, Inc.

Current cost per unit: $14.75

Cost per unit offered by Specialty Products, Inc.: $13.10

Difference in cost per unit: $14.75 - $13.10 = $1.65

Since the cost per unit offered by Specialty Products, Inc. is lower, Marco Enterprises will save $1.65 per unit by outsourcing.

To calculate the increase in operating income, we need to multiply the cost savings per unit by the number of units produced, which is currently 105,000.

Increase in operating income = Cost savings per unit * Number of units produced

= $1.65 * 105,000

= $173,250

Therefore, if Marco Enterprises outsources the manufacturing of the component, the operating income will increase by $173,250.

2. The maximum price per unit that Marco Enterprises would be willing to pay if it outsources the component can be calculated based on the contribution margin generated by the new product that can be produced using the freed capacity.

Contribution margin per year from the new product: $33,000

To calculate the maximum price per unit, we need to divide the contribution margin by the number of units that can be produced using the freed capacity.

Number of units that can be produced using the freed capacity is the same as the number of components currently produced, which is 105,000.

Maximum price per unit = Contribution margin per year / Number of units produced

= $33,000 / 105,000

= $0.3143 per unit (rounded to four decimal places)

Therefore, Marco Enterprises would be willing to pay a maximum price of $0.3143 per unit if it outsources the component.