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
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 |
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| |
Plus: Fixed costs |
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|
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Total cost of 105,000 components |
|
|
|
Less: Profit from another product |
|
|
|
Net cost |
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|
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Enter any number in the edit fields and then click Check Answer.
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Requirements
1. | If Marco Enterprises outsources the manufacturing of the component, will operating income increase or decrease? By how much? |
2. | What is the maximum price per unit MarcoMarco Enterprises would be willing to pay if it outsources the component? |
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 |
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