Question

Instant 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 $12.90 per unit. Instant ?Enterprises' current cost is $18.75 per unit of the? component, based on the 125,000 components that Instant Enterprises currently produces. This current cost per unit is based on the following? calculations:

Direct material per unit $5.50

Direct labor per unit 7.25

Variable manufacturing overhead per unit 2.75

Fixed manufacturing overhead per unit 3.25

Total manufacturing costs per unit $18.75

None of Instant ?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 $32,000 of contribution margin per year.

Requirement 1. If Instant 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 125,000 components
Less: Profit from another product
Net cost

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

by $

.

Requirement 2. What is the maximum price per unit Instant 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 125,000 components	=	Cost if outsourcing 125,000 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 Instant Enterprises would be willing to pay if it outsources the component is $

per unit.

.

Answer 1

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