CM Company manufactures a component used in the production of one of its main products.The following cost information is available: $$\begin{array} { | l | r | }
\hline \text { Direct materials } & \$ 410 \
\hline \text { Direct labor (variable) } & 100 \
\hline \text { Variable manufacturing overhead } & 90 \
\hline \text { Fixed manufacturing overhead } & 35 \
\hline
\end{array}$$ A supplier has offered to sell the component to CM for $630 per unit.If CM buys the component from the supplier,the released facilities can be used to manufacture a product that would generate a contribution margin of $10,000 annually.Assuming that CM needs 4,000 components annually and that the fixed manufacturing overhead is unavoidable,what would be the impact on operating income if CM outsources?

Question

CM Company manufactures a component used in the production of one of its main products.The following cost information is available: $$\begin{array} { | l | r | } 
\hline \text { Direct materials } & \$ 410 \
\hline \text { Direct labor (variable) } & 100 \
\hline \text { Variable manufacturing overhead } & 90 \
\hline \text { Fixed manufacturing overhead } & 35 \
\hline
\end{array}$$ A supplier has offered to sell the component to CM for $630 per unit.If CM buys the component from the supplier,the released facilities can be used to manufacture a product that would generate a contribution margin of $10,000 annually.Assuming that CM needs 4,000 components annually and that the fixed manufacturing overhead is unavoidable,what would be the impact on operating income if CM outsources?

Quizplus · Accepted Answer

The total cost to manufacture one component is $410 (direct materials) + $100 (direct labor) + $90 (variable manufacturing overhead) = $600. For 4,000 components, the total manufacturing cost is $600 * 4,000 = $2,400,000. If CM outsources, it would cost $630 * 4,000 = $2,520,000, an increase of $120,000. However, outsourcing allows generating an additional $10,000 in contribution margin. Thus, the net impact is an increase in costs of $120,000 - $10,000 = $110,000, leading to a decrease in operating income by $110,000.

CM Company Manufactures a Component Used in the Production of One