Question

Montel Firm is considering whether to outsource the manufacture of subcomponent JXY. The accounting department provides the following cost information for manufacturing 11,800 units of subcomponent JXY per month.

Direct materials costs		$41,400
Direct labour costs		28,900
Variable overhead		15,800
Fixed overhead*		12,700

*Fixed overhead includes $5,300 supervisor’s salary.

International Firm agrees to supply Montel with 11,800 units per month for a total cost of $145,700. If subcomponent JXY is outsourced, Montel will be able to increase the production and sales of its final product by 1,060 units per month; the product is sold for $120 per unit and its average variable costs per unit are $75. The supervisor’s salary will be eliminated if subcomponent JXY is outsourced.

repare an incremental analysis for subcomponent JXY. (If an amount reduces the incremental costs then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

Based on your analysis, what decision should management make?

Management should decide to

JXY as it would cost an additional $

if they were to

the units.

Would the decision be different if Montel has the opportunity to produce and sell 2,400 units with the facilities currently being used to manufacture subcomponent JXY?

Answer 1

MONTEL FIRM - SUBCOMPONENET JXY
	Make	Buy	Incremental costs ( savings )
Purchase price		145700	-145700
Direct materials	41400		41400
Direct labour	28900		28900
Variable overhead	15800		15800
Fixed overhead	5300		5300
Opportunity cost ( 1060 * [ 120 - 75 ] )	47700		47700
Total annual cost	139100	145700	-6600
Make JXY component inhouse as it will result in cost savings of $ 6600.
MONTEL FIRM - SUBCOMPONENET JXY
	Make	Buy	Incremental costs ( savings )
Purchase price		145700	-145700
Direct materials	41400		41400
Direct labour	28900		28900
Variable overhead	15800		15800
Fixed overhead	5300		5300
Opportunity cost ( 2400 * [ 120 - 75 ] )	108000		108000
Total annual cost	199400	145700	53700
Buy JXY componenet inhouse as it will result in cost savings of $ 53700.