Exercise 7.31 a-c

Montel Firm is considering whether to outsource the manufacture of subcomponent JXY. The accounting department provides the following cost information for manufacturing 10,800 units of subcomponent JXY per month.

Direct materials costs		$38,900
Direct labour costs		29,900
Variable overhead		17,300
Fixed overhead*		14,000

*Fixed overhead includes $5,300 supervisors salary. International Firm agrees to supply Montel with 10,800 units per month for a total cost of $137,400. If subcomponent JXY is outsourced, Montel will be able to increase the production and sales of its final product by 1,050 units per month; the product is sold for $115 per unit and its average variable costs per unit are $75. The supervisors salary will be eliminated if subcomponent JXY is outsourced.

Based on your analysis, what decision should management make?

Make or Buy?

How much would it cost additional if they were to do the opposite decision?

Would the decision be different if Montel has the opportunity to produce and sell 2,200 units with the facilities currently being used to manufacture subcomponent JXY?

Prepare an incremental analysis for subcomponent JXY. (If an amount reduces the incremental costs then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).) Incremental Costs (Savings) Make Buy