Mosby Design And Manufacturing Case Study

Case: 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:
Table 1: Allocation of cost for Mosby’s RB911
Cost per unit Not to buy or purchase from other suppliers To purchase from another supplier
Direct materials $9.00 Inclusive in the price
Direct labor $3.00 Inclusive in the price
Variable overhead $2.50 Inclusive in the price
Fixed overhead $4.00 Inclusive in the price
Total $18.50 per unit $16.00
40 units annually x 40,000 units per year x 40,000 units per year
Total annual costs for RB911 = $740,000 = $640,000
Total fixed overhead $4.00 x 40,000 units = 160,000
Direct fixed overhead $88,000
Common fixed overhead $72,000 (calculated as: $160,000 - $88,000)
Now suppose that all of the fixed overhead is common fixed overhead. Should Mosby make or buy part RB911? Justify why/why not. If Mosby will decide to purchase the RB911, the cost savings will be at least $100,000 less the common fixed overhead of $72,000, for a total of $28,000 annual savings. Thus, the increase in income amounts to $28,000. However, suppose that the total fixed costs of $160,000 are allocated as entirely common fixed costs, Mosby will have a net loss of at least -$60,000 (calculated as: $100,000 – $160,000). In this case, it is better that Mosby will produce the RB911 instead of having to purchase it from another supplier with the prescribed terms.
What is the most Mosby would be willing to pay an outside supplier? Upon the countenance of the total common fixed cost of $160,000, Mosby is better off if it pays an amount that is less than $14.50, which in this case will provide some savings for the company by at least cents or more per unit (See Table 2).
Table 2: Pricing Terms for RB911 To produce RB911 To buy RB911
Total $18.50 per unit