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 25,000 units of the module per year for $22.00 each. The following information pertains to MSI’s production of the control modules: Direct materials $ 13 Direct labor 6 Variable manufacturing overhead 2 Fixed manufacturing overhead 8 Total cost per unit $ 29 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.

Answer 1

Answer:

Difference in cost = 1,23,000

Explanation:

Differential Cost:

Differential cost refers to the difference in cost between two or more possible business decisions.

As the company has received a bid from Monte Legend Co. (MLC) to produce 25,000 units of the module per year so

Manufacturing cost:

Direct material = 25000 * 13

Direct material = 325000  

Direct Labour = 25000 * 6

Direct Labour = 150000  

Variable Manufacturing Overhead = 25000*2

Variable Manufacturing Overhead = 50000  

Total Manufacturing Cost = 325000 + 150000 + 50000

Total Manufacturing Cost = 525000

Buying cost:

Purchase Cost = 25000*29

Purchase Cost = 648000

Difference in cost = Total Buying cost - Total Manufacturing Cost

Difference in cost = 648000 - 525000

Difference in cost = 1,23,000