Marco Enterprises manufactures one of the components used to assemble its main c
ID: 2607909 • 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 co st $13.10
per unit.
Marco
?Enterprises' current cost is
$14.75
per unit of the?component, 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
$1,286,250
$1,375,500
$89,250
Plus: Fixed costs
0
0
0
Total cost of 105,000 components
$1,286,250
$1,375,500
$89,250
Less: Profit from another product
0
33,000
33,000
Net cost
$1,286,250
$1,342,500
$56,250
If Marco Enterprises outsources the manufacturing of the component, operating income will
decrease
by $
56,250
.
Requirement 2. What is the maximum price per unit
MarcoMarco
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 105,000 components
=
Cost if outsourcing 105,000 components
Variable costs + Fixed costs
=
Variable costs + Fixed costs
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 Marco Enterprises would be willing to pay if it outsources the component is $
per unit
Incremental Analysis
Make
Outsource
Outsourcing Decision
Component
Component
Difference
Variable costs
$1,286,250
$1,375,500
$89,250
Plus: Fixed costs
0
0
0
Total cost of 105,000 components
$1,286,250
$1,375,500
$89,250
Less: Profit from another product
0
33,000
33,000
Net cost
$1,286,250
$1,342,500
$56,250
Explanation / Answer
The maximum price per unit that Macro Enterprises would be willing to pay if it outsources the component is calculated as follows:-
Let the cost per unit of outsourcing the component is x.
Cost if making 105,000 components = Cost if outsourcing 105,000 components
(105,000*$12.25) + $262,000 = (105,000*$x) - $33,000 + $262,000
$1,286,250 + $262,000 +$33,000 - $262,000 = 105,000x
105,000x = $1,319,250
x = ($1,319,250/105,000) = $12.56 per unit
Therefore the maximum price per unit Marco Enterprises would be willing to pay if it outsources the component is $12.56 per unit.