Problem 2 – Louder Company manufactures part MNO used in several of its truck models. A total of 10,000 units are produced each year with production costs as follows: Direct materials

Problem 2 – Louder Company manufactures part MNO used in several of its truck models. A total of 10,000 units are produced each year with production costs as follows:

Direct materials $ 65,000

Direct manufacturing labor 45,000

Variable support costs 55,000

Fixed support costs 60,000

Total costs $225,000

Louder Company has the option of purchasing part MNO from an outside supplier at $19.95 per unit. If MNO is outsourced, 35% of the fixed costs cannot be immediately converted to other uses.

Question 1: What amount of the MNO production costs is avoidable? (five points)

Question 2: Should the company outsource MNO? Why or why not? For full credit, show all calculations. (five points)

Question 3: What other items should the company consider before outsourcing any of the parts it manufactures? (five points)

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