Question

Enterprises manufactures one of the components used to assemble its main company product. Specialty? Products, Inc., has offered to make the component at a cost of $12.40 per unit. Nesbitt Enterprises' current cost is $15.00 per unit of the? component, based on the 120,000 components that Nesbitt Enterprises currently produces.

This current cost per unit is based on the following? calculations:

Direct material per unit $5.50

Direct labor per unit 5.75

Variable manufacturing overhead per unit 0.75

Fixed manufacturing overhead per unit 3.00

Total manufacturing costs per unit $15.00

None of Nesbitt ?Enterprises' fixed costs will be eliminated if the component is outsourced.?However, the freed capacity could be used to build a new product. This new product would be expected to generate $31,000 of contribution margin per year.

Requirement 1. If

NesbittNesbitt

Enterprises outsources the manufacturing of the? component, will operating income increase or? decrease? By how? much? ?(Enter a? "0" for any zero balances. Use a minus sign or parentheses in the Difference column when the cost to make exceeds the cost to? buy.)

Incremental Analysis	Make	Outsource
Outsourcing Decision	Component	Component	Difference
Variable costs
Plus: Fixed costs
Total cost of 120,000 components
Less: Profit from another product	0
Net cost

If Nesbitt Enterprises outsources the manufacturing of the component, operating income will

by $

.

Requirement 2. What is the maximum price per unit Nesbitt Enterprises would be willing to pay if it outsources the? component?

Begin by identifying the basic formula that is used to determine the indifferent outsourcing cost per unit.

Cost if making 120,000 components	=	Cost if outsourcing 120,000 components
	=

Using the basic formula you determined above solve for the indifferent outsourcing cost per unit. ?(Round your answer to the nearest ? cent, $X.XX.)

The maximum price per unit Nesbitt Enterprises would be willing to pay if it outsources the component is $

per unit.

Answer 1

		Direct Material cost per unit	$5.50
		Direct Labor cost per unit	$5.75
		Variable Mfg Overhead/Unit	0.75
		Total Variable costs per unit	$12.00
		Total Variablecosts for 120,000 units	$1,440,000.00
		Fixed cost per unit	$3
		Total fixed costs for 120,000 units	$360,000
		Cost for outsourcing	$                                  1,488,000	(12.4*120000)
	Incremental Analysis	Make	Outsource
	Outsourcing Decision	Component	Component	Difference
	Variable costs	$1,440,000.00	$                         1,488,000	$48,000.00
	Plus: Fixed costs	$360,000	$360,000	$0
	Total cost of 120,000 components	$1,800,000.00	$                         1,848,000	$48,000.00
	Less: Profit from another product	$0	$31,000	($31,000)
	Net cost	$1,800,000.00	$                         1,817,000	$17,000.00
	If Nesbitt Enterprises outsources the manufacturing of the component, operating income will		Decrease by $17000		$17,000
	Maximum Price per unit	12.25833333	(1440000+31000)/120000
	The maximum price per unit Nesbitt Enterprises would be willing to pay if it outsources the component is $	$                                12.26	per unit.			$0