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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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  1. 14 May, 10:37
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    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
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