The Svenson Corporation manufactures cellular modems. It manufactures its own cellular modem circuit boards (CMCB), an important part of the cellular modem. It reports the following cost information about the costs of making CMCBs in 2014 and the expected costs in 2015:
Current Costs in 2014 Expected Costs in 2015
Variable manufacturing costs
Direct material cost per CMCB $180 $170
Direct manufacturing labor cost per CMCB 50 45
Variable manufacturing cost per batch for setups, materials handling, and quality control 1,600 1,500
Fixed manufacturing cost
Fixed manufacturing overhead costs that can be avoided if CMCBs are not made 320,000 320,000
Fixed manufacturing overhead costs of plant depreciation, insurance, and administration that cannot be avoided even if CMCBs are not made 800,000 800,000
Svenson manufactured 8,000 CMCBs in 2014 in 40 batches of 200 each. In 2015, Svenson anticipates needing 10,000 CMCBs. The CMCBs would be produced in 80 batches of 125 each.
The Minton Corporation has approached Svenson about supplying CMCBs to Svenson in 2015 at$300 per CMCB on whatever delivery schedule Svenson wants.
1. Calculate the total expected manufacturing cost per unit of making CMCBs in 2015.
2. Suppose the capacity currently used to make CMCBs will become idle if Svenson purchases CMCBs from Minton. On the basis of financial considerations alone, should Svenson make CMCBs or buy them from Minton? Show your calculations.
3. Now suppose that if Svenson purchases CMCBs from Minton, its best alternative use of the capacity currently used for CMCBs is to make and sell special circuit boards (CB3s) to the Essex Corporation. Svenson estimates the following incremental revenues and costs from CB3s:
Total expected incremental future revenues $2,000,000
Total expected incremental future costs $2,150,000
4. On the basis of financial considerations alone, should Svenson make CMCBs or buy them from Minton? Show your calculations.