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MSI is considering outsourcing the production of the handheld control module used with some of its products. The company has received a bid from Monte Legend Co. (MLC) to produce 10,000 units of the module per year for $16 each. The following information pertains to MSI’s production of the control modules:
Direct materials $9
Direct labor $4
Variable manufacturing overhead $2
Fixed manufacturing overhead $3
Total cost per unit $18
MSI has determined that it could eliminate all variable costs if the control modules were produced externally, but none of the fixed overhead is avoidable. At this time, MSI has no specific use in mind for the space that is currently dedicated to the control module production.
Compute the difference in cost between making and buying the control module.

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Answer:

If the company makes the units in-house, it will save $10,000.

Explanation:

The fixed costs will remain in both options. Therefore, the fixed costs are irrelevant to the decision-making process.

Buy:

Total cost= 10,000*16= $160,000

Make in house:

Total cost= 10,000*(9 + 4 + 2)= $150,000

If the company makes the units in-house, it will save $10,000.

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