Question
Nesbitt Enterprises manufactures one of the components used to assemble its main company product. Specialty Products, Inc., has offered to make the component at a
Nesbitt 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
$13.00 per unit. Nesbitt Enterprises' current cost is $15.50 per unit of the component, based on the 80,000 components that Nesbitt Enterprises currently produces. Read the requirements.
This current cost per unit is based on the following calculations: None of Nesbitt 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 $26,000 of contribution margin per year.
Requirement 1. If Nesbitt 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 |
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Outsourcing Decision | Component | Component | Difference |
Variable costs |
|
| |
Plus: Fixed costs |
|
|
|
Total cost of 80,000 components |
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|
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Less: Profit from another product |
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|
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Net cost |
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Direct material per unit. . . . . . . . . . . . . . . . . . | $4.75 |
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Direct labor per unit. . . . . . . . . . . . . . . . . . . . . | 7.00 |
Variable manufacturing overhead per unit. . | 2.50 |
Fixed manufacturing overhead per unit. . . . | 1.25 |
Total manufacturing costs per unit. . . . . . . . | $15.50 |
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