CM Company manufactures a component used in the production of one of its main products. The following cost information is available: Direct materials $410 Direct labor (variable) 100 Variable manufacturing OH 90 Fixed manufacturing OH 35 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 $30,000 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

Ashanti Arnold

Business

23 October, 11:57

CM Company manufactures a component used in the production of one of its main products. The following cost information is available: Direct materials $410 Direct labor (variable) 100 Variable manufacturing OH 90 Fixed manufacturing OH 35 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 $30,000 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

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Braeden Bray · Answer 1

NPV = 661468 - 728000 = - 66532

Explanation:

Direct Material 410

Direct Labour 100

Variable manufacturing O/H 90

Variable cost to manufacture 1 unit 600

Loss on purchase component from outside supplier

(630 - 600) * 3000 units 90000

(-) Contribution from released facility 10000

Operating Income would Decrease by 80000

Present Value of Future cash flow from Proposal X : -

PVAF for 5 years at 10% = 3.791

PVIF for 5th year at 10% = 0.621

PV of annual cash inflow (164000 * 3.791) 621724

PV of Residual value (64000 * 0.621) 39744

Present Value of Future cash flow 661468

NPV = 661468 - 728000 = - 66532