Question

Montel Firm is considering whether to outsource the manufacture of subcomponent JXY. The accounting department provides the following cost information for manufacturing 10,300 units of subcomponent JXY per month.

Direct materials costs		$39,800
Direct labour costs		29,300
Variable overhead		17,100
Fixed overhead*		13,700

*Fixed overhead includes $5,600 supervisor’s salary.

International Firm agrees to supply Montel with 10,300 units per month for a total cost of $117,700. If subcomponent JXY is outsourced, Montel will be able to increase the production and sales of its final product by 1,080 units per month; the product is sold for $100 per unit and its average variable costs per unit are $80. The supervisor’s salary will be eliminated if subcomponent JXY is outsourced.

Prepare 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).)

		Make		Buy		Incremental Costs (Savings)
Cost of good soldDirect labourOpportunity costManufacturing overheadFixed overheadTotal annual costPurchase priceDirect materialsVariable overhead		$		$		$
Fixed overheadCost of good soldDirect materialsTotal annual costOpportunity costPurchase priceVariable overheadManufacturing overheadDirect labour
Opportunity costCost of good soldDirect labourManufacturing overheadDirect materialsVariable overheadFixed overheadPurchase priceTotal annual cost
Manufacturing overheadOpportunity costDirect materialsFixed overheadTotal annual costDirect labourVariable overheadPurchase priceCost of good sold
Direct labourVariable overheadFixed overheadManufacturing overheadOpportunity costDirect materialsCost of good soldPurchase priceTotal annual cost
Direct materialsOpportunity costTotal annual costCost of good soldVariable overheadDirect labourManufacturing overheadPurchase priceFixed overhead
Manufacturing overheadFixed overheadPurchase priceOpportunity costTotal annual costCost of good soldDirect materialsDirect labourVariable overhead		$		$		$

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? YesNo

Answer 1