Marco Enterprises manufactures one of the components used to assemble its main c
ID: 2607823 • Letter: M
Question
Marco 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
$13.10
per unit.
Marco
Enterprises' current cost is
$14.75
per unit of thecomponent, based on the
105,000
components that
Marco
Enterprises currently produces. Read the requirements
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.
This current cost per unit is based on the following calculations:
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(Click the icon to view the information.)None of
Marco
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
$33,000
of contribution margin per year.
Requirement 1. If
MarcoMarco
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 105,000 components
Less: Profit from another product
Net cost
Enter any number in the edit fields and then click Check Answer.
Requirements
1.
Marco
2.
MarcoMarco
Data Table
Direct material per unit
$3.75
Direct labor per unit
7.75
Variable manufacturing overhead per unit
0.75
Fixed manufacturing overhead per unit
2.50
Total manufacturing costs per unit
$14.75
Incremental Analysis
Make
Outsource
Outsourcing Decision
Component
Component
Difference
Variable costs
Plus: Fixed costs
Total cost of 105,000 components
Less: Profit from another product
Net cost
Explanation / Answer
Incremental Analysis Make Outsource Outsourcing Decision Component Component Difference Variable costs 1286250 1375500 89250 [105000*(3.75+7.75+0.75)] [105000*13.10] Plus: Fixed costs 262500 0 -262500 Total cost of 105,000 components 1548750 1375500 -173250 Less: Profit from another product 0 33000 33000 Net cost 1548750 1342500 -206250 ANSWERS: Operating income will increase by $206,250, as the net cost of outsourcing is lower by that amount. Maximum price it can pay = Costs saved by outsourcing-Contribution that can be earned from (1548750-33000)/105000 = $14.44