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 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

Plus: Fixed costs

Total cost of 105,000 components

Less: Profit from another product

Net cost

Enter any number in the edit fields and then click Check Answer.

Requirements

1.

Marco

2.

MarcoMarco

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

Incremental Analysis	Make	Outsource
Outsourcing Decision	Component	Component	Difference
Variable costs
Plus: Fixed costs
Total cost of 105,000 components
Less: Profit from another product
Net cost

Solution

Incremental Analysis Make Outsource Outsourcing Decision Component Component Difference Variable costs 1286250 1375500 89250 [105000*(3.75+7.75+0.75)] [105000*13.10] Plus: Fixed costs 262500 0 -262500 Total cost of 105,000 components 1548750 1375500 -173250 Less: Profit from another product 0 33000 33000 Net cost 1548750 1342500 -206250 ANSWERS: Operating income will increase by $206,250, as the net cost of outsourcing is lower by that amount. Maximum price it can pay = Costs saved by outsourcing-Contribution that can be earned from (1548750-33000)/105000 = $14.44