Marco Enterprises manufactures one of the components used to

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 co st $13.10

per unit.

Marco

?Enterprises\' current cost is

$14.75

per unit of the?component, 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

$1,286,250

$1,375,500

$89,250

Plus: Fixed costs

0

0

0

Total cost of 105,000 components

$1,286,250

$1,375,500

$89,250

Less: Profit from another product

0

33,000

33,000

Net cost

$1,286,250

$1,342,500

$56,250

If Marco Enterprises outsources the manufacturing of the component, operating income will

decrease

by $

56,250

.

Requirement 2. What is the maximum price per unit

MarcoMarco

Enterprises would be willing to pay if it outsources the? component?

Begin by identifying the basic formula that is used to determine the indifferent outsourcing cost per unit.

Cost if making 105,000 components

=

Cost if outsourcing 105,000 components

Variable costs + Fixed costs

=

Variable costs + Fixed costs

Using the basic formula you determined above solve for the indifferent outsourcing cost per unit. ?(Round your answer to the nearest ? cent, $X.XX.)

The maximum price per unit Marco Enterprises would be willing to pay if it outsources the component is $

per unit

Incremental Analysis	Make	Outsource
Outsourcing Decision	Component	Component	Difference
Variable costs	$1,286,250	$1,375,500	$89,250
Plus: Fixed costs	0	0	0
Total cost of 105,000 components	$1,286,250	$1,375,500	$89,250
Less: Profit from another product	0	33,000	33,000
Net cost	$1,286,250	$1,342,500	$56,250

Solution

The maximum price per unit that Macro Enterprises would be willing to pay if it outsources the component is calculated as follows:-

Let the cost per unit of outsourcing the component is x.

Cost if making 105,000 components = Cost if outsourcing 105,000 components

(105,000*$12.25) + $262,000 = (105,000*$x) - $33,000 + $262,000

$1,286,250 + $262,000 +$33,000 - $262,000 = 105,000x

105,000x = $1,319,250

x = ($1,319,250/105,000) = $12.56 per unit

Therefore the maximum price per unit Marco Enterprises would be willing to pay if it outsources the component is $12.56 per unit.