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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Business

Villarreal

14 May, 07:11

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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Jillian Herring · 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