CM Manufacturing has provided the following unit costs pertaining to a component they manufacture and use in the production of one of their main products:
$$\begin{array} { | l | l | }
\hline \text { Direct materials } & \$ 410 \
\hline \text { Direct labour (variable) } & 110 \
\hline \text { Variable manufacturing overhead } & 30 \
\hline \text { Fixed manufacturing overhead } & 30 \
\hline
\end{array}$$
A supplier has offered to provide the component to CM Manufacturing for $650 per unit.If CM Manufacturing acquire the component from the supplier,they could use the released facilities to manufacture a product which would generate contribution margin of $10,000 annually.Assuming that CM Manufacturing needs 4000 components annually and the fixed manufacturing overhead is unavoidable,what would be the impact on operating profit if the company outsources?

Question

CM Manufacturing has provided the following unit costs pertaining to a component they manufacture and use in the production of one of their main products:
$$\begin{array} { | l | l | } 
\hline \text { Direct materials } & \$ 410 \
\hline \text { Direct labour (variable) } & 110 \
\hline \text { Variable manufacturing overhead } & 30 \
\hline \text { Fixed manufacturing overhead } & 30 \
\hline
\end{array}$$
A supplier has offered to provide the component to CM Manufacturing for $650 per unit.If CM Manufacturing acquire the component from the supplier,they could use the released facilities to manufacture a product which would generate contribution margin of $10,000 annually.Assuming that CM Manufacturing needs 4000 components annually and the fixed manufacturing overhead is unavoidable,what would be the impact on operating profit if the company outsources?

Quizplus · Accepted Answer

The cost to manufacture one component is $580 ($410 + $110 + $30 + $30). Buying from the supplier costs $650, which is $70 more per unit. For 4000 units, this is an additional cost of $280,000. However, outsourcing allows generating an additional $10,000 contribution margin. Thus, the net impact is a decrease in operating profit by $270,000 - $10,000 = $190,000.

CM Manufacturing Has Provided the Following Unit Costs Pertaining to a Component