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 11,000 units of the module per year for $17.00 each. the following information pertains to msi’s production of the control modules: direct materials $ 8 direct labor 4 variable manufacturing overhead 4 fixed manufacturing overhead 8 total cost per unit $ 24 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 $41,000 in annual profit. recompute the difference in cost between making and buying under this scenario. 3-b. does this change your recommendation to msi?

2. Based on the above differential anaylsis msi should continue to make control module reason being that buying the control module will result into incremental cost of $11,000 to the msi.

3a. Differential analysis

Buy control module (Alt 1) or Make control module (Alt 2)

Buy control module Make control module Differential effect on cost

(Alt 1) (Alternative 2) (Alternative 2)

Purchase price $187,000 - ($187,000)

(11,000×$17)

Direct materials $0 $88,000 $88,000

(11,000×$8)

Direct labor $0 $44,000 $44,000

(11,000×$4)

Variable overhead $0 $44,000 $44,000

(11,000×$4)

Fixed overhead $44,000 $44,000 $0

(11,000×$8)

Less profit from new product line

($41,000) $0 $41,000

Total cost $190,000 $220,000 $30,000

Difference in cost $30,000

3b. Based on the above differential anaylsis msi should buy the control module reason being that buying the control module will result into incremental savings of $30,000 to the msi. The recommendation to msi is changed based on the new scenario.

Inconclusion Msi should continue to make control module because buying the control module will result into incremental cost of $11,000 to the msi.

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