games. The company has several product lines based on the age

range of the target market. MSI sells both individual games as well as

packaged sets. All games are in CD format, and some utilize

accessories such as steering wheels, electronic tablets, and hand

controls. To date, MSI has developed and manufactured all the CDs

itself as well as the accessories and packaging for all of its products.

The gaming market has traditionally been targeted at teenagers and

young adults; however, the increasing affordability of computers and

the incorporation of computer activities into junior high and

elementary school curriculums has led to a significant increase in

sales to younger children. MSI has always included games for

younger children but now wants to expand its business to capitalize

on changes in the industry. The company currently has excess

capacity and is investigating several possible ways to improve

profitability.

E$7-7($Algo$)$ Analyzing Make$-$or$-$Buy Decision $[$LO $7-2,7-4]$

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

Company $($MLC$)$ to produce $23,000$ units of the module per year for $$24\mathrm{.}00$ each. The

following information pertains to MSI's production of the control modules:

MSI has determined 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.

Required:

Compute the difference in cost between making and buying the control module.

Should MSI buy the modules from MLC or continue to make them?

$3-$a$.$ Suppose the MSI space currently used for the modules could be utilized by a nev

product line that would generate $$45,000$ in annual profit. Recompute the difference

in cost between making and buying under this scenario.

$3-$b$.$ Does this change your recommendation to MSI?