The Svenson Corporation manufactures cellular modems. It manufactures its own cellular
modem circuit boards (CMCB), an important part of the cellular modem. It reports the
following cost information about the costs of making CMCBs in 2020 and the expected
costs in 2021.
Current
costs in
2020
Expected
costs in
2021
Variable manufacturing costs
Direct material cost per CMCB $ 180 $ 170
Direct manufacturing labor cost per CMCB 50 45
Variable manufacturing cost per batch for setups,
materials handling, and quality control
1,600 1,500
Fixed manufacturing cost
Fixed manufacturing overhead costs that can be avoided
if CMCBs are not made
320,000 320,000
Fixed manufacturing overhead costs of plant
depreciation, insurance, and administration that cannot
be avoided even if CMCBs are not made
800,000 800,000
Svenson manufactured 8,000 CMCBs in 2020 in 40 batches of 200 each. In 2021,
Svenson anticipates needing 10,000 CMCBs. The CMCBs would be produced in 80
batches of 125 each.
The Minton Corporation has approached Svenson about supplying CMCBs to Svenson in
2021 at $300 per CMCB on whatever delivery schedule Svenson wants.
a) Calculate the total expected manufacturing cost per unit of making CMCBs in 2021.
b) Suppose the capacity currently used to make CMCBs will become idle if Svenson
purchases CMCBs or buy them from Minton. On the basis of financial considerations
alone, should Svenson make CMCBs or buy them from Minton? Show your calculations.
c) Now suppose that if Svenson purchases CMCBs from Minton, its best alternative use
of the capacity currently used for CMCBs is to make and sell special circuit boards
(CB3s) to the Essex Corporation. Svenson estimates the following incremental revenues
and costs from CB3s:
Total expected incremental future revenues $2,750,000
Total expected incremental future costs $2,150,000
On the basis of financial considerations alone, should Svenson make CMCBs or buy
them from Minton? Show your calculations