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 14,000 units of the module per year for $18.00 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 . $22 MSI has determined that it could eliminate all variable costs if the control modules were produced externally, but none of the fxed 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 fference in Cost

Answer 1

The answer is 28000

Step-by-step explanation:

1)as far as the fixed cost is unavoidable If units are purchased from outside Therefore it is irrelevant in decision making

Variable cost of manufacturing (since avoidable ,savings) =8+6+2= 16

Purchase cost :18

Difference in cost :14000[18-16 ]

= 28000

Answer 2

1)

cost of making (14000*22) = 308000

cost of buying (14000*(18+6)) = 336000

Difference cost = 28000

2)

No, Since, there is not other use of fixed cost, therefore, fixed cost will be a part of cost of buying.

3-a)

cost of making (14000*22) = 308000

cost of buying (14000*18) = 252000

3-b)

Yes, Since, there is other use of fixed cost, therefore, fixed cost will not be a part of cost of buying.