Mosby Design and Manufacturing is currently manufacturing

Mosby Design and Manufacturing is currently manufacturing part RB911, producing 40,000 units
annually. The part is used in the production of several products made by Mosby. The cost per unit for
RB911 is as follows:
Direct materials $ 9.00
Direct labour $ 3.00
Variable overhead $ 2.50
Fixed overhead $ 4.00
= $18.50
Of the total fixed overhead assigned to RB911, $88,000 is direct fixed overhead (the lease of production
machinery and salary of a production line supervisor – neither of which will be needed if the line is
dropped). The remaining fixed overhead is common fixed overhead. An outside supplier has offered to
sell the part to Mosby for $16. There is no alternative use for the facilities currently used to produce the
part.
Required:
1. Should Mosby make or buy part RB911? Justify
Mosby should buy part RB911.
Materials, labour and variable overhead will no longer be needed if production stops leaving a $14.50
savings. Due to the $1.80 common fixed overhead being unavoidable it leaves a $2.20 extra savings from
the lease of production machinery and salary of a production line supervisor.
Therefore Mosby receives a $0.70 savings per unit with a total savings of $28,000 per year. Direct materials
Direct labour
Variable overhead
Direct fixed overhead
BUYTOTAL Savings Costs Make
-9.0
-3.0
-2.5
-2.2
0
-16.7 Buy
0
0
0
0
16
16 Diff.
9.0
3.0
2.5
2.2
-16
0.7 2. What is the most Mosby would be willing to pay an outside supplier?
At the total savings of $0.70 per unit Mosby would be willing to pay an outside supplier a maximum
of $16.69 to still save an amount of money.
3. If Mosby bought the part, by how much would income increase or decrease?
If Mosby buys the part income would increase to the amount of $28,000 annually as that amount is
saved if Mosby chooses to buy at the price of $16 per unit. Now suppose that all of the fixed overhead is common fixed overhead.
4. Should Mosby make or buy part RB911? Justify why/why not.
Mosby should buy part RB911. With all fixed overhead being common fixed overhead it remains a total
increase of costs to $1.50 per unit. Therefore 40,000*1.50= $60,000 total increase in costs per year. Total costs Savings Costs Direct materials
Direct labour
Variable overhead
Direct fixed overhead
BUYTOTAL Make
-9.0
-3.0
-2.5
0
0
-14.5 Buy
0
0
0
0
16
16 Diff.
9.0
3.0
2.5
0
-16
1.5 5. What is the most Mosby would be willing to pay an outside supplier?
The most Mosby would be willing to pay an outside supplier is $14.49 to remain saving any amount
of money.
6. If Mosby bought the part, by how much would income increase or decrease?
Income would decrease by $60,000.