Montel Firm is considering whether to outsource the manufacture of subcomponent JXY. The accounting department provides the following cost information for manufacturing 10,000 units of the subcomponent JXY per month.
Direct materials costs..............................$40,000
Direct labour costs....................................30,000
Variable overhead....................................15,000
Fixed overhead*.....................................14,000
*Fixed overhead includes $5,000 supervisor's salary.
International Firm agrees to supply Montel with 10,000 units per month for a total cost of $120,000. If the sub-component JXY is outsourced, Montel will be able to increase the production and sales of its final product by 1,000 units per month, which is sold for $100 per unit and its average variable costs per unit are $75. The supervisor's salary will be eliminated if subcomponent JXY is outsourced.
Instructions
(a) Prepare an incremental analysis for the subcomponent JXY. Your analysis should have columns for
(1) Make the sub-component JXY,
(2) Buy the subcomponent JXY,
(3) Incremental Costs (Savings).
(b) Based on your analysis, what decision should management make?
(c) Would the decision be different if Montel has the opportunity to produce 2,000 units with the facilities currently being used to manufacture the subcomponent JXY? Show calculations.