Make vs. Buy Decisions: Insourcing or Outsourcing AMDAMD manufactures one of its major components, silicon wafers, at the sameproduction facility where it assembles the microprocessors. One of its vendors hasoffered AMD to manufacture silicon wafers at a price of $2.00 each. Costinformation for internally producing one silicon wafer is as follows:Production Costs for1 million units$ 750,000500,0001,500,000$ 2,750,000Direct materialsDirect Mfg. LaborMfg. OverheadTotal cost+↓Cost per unit$0.750.501.50$2.75111 1 1 151 1 1 1 11 1 11 1 1 1# 31 1 AAMDExample 3 (Continued)Insourcing vs. Outsourcing DecisionsAfter summarizing the costs of producing silicon wafers at the AMDfactory, the company learned that $500,000 in fixed manufacturingoverhead costs can be eliminated if this component is outsourced (theseinclude engineering salaries and depreciation of production equipment).●1Also, it is estimated that closing off the part of the plant where the siliconwafers are produced would save $300,000 in electricity costs, which areconsidered variable mfg. overhead costs.• Should the silicon wafers be outsourced or manufacture internally inthe AMD factory?

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Make vs. Buy Decisions: Insourcing or Outsourcing AMD
AMD manufactures one of its major components, silicon wafers, at the same
production facility where it assembles the microprocessors. One of its vendors has
offered AMD to manufacture silicon wafers at a price of $2.00 each. Cost
information for internally producing one silicon wafer is as follows:
Production Costs for
1 million units
$ 750,000
500,000
1,500,000
$ 2,750,000
Direct materials
Direct Mfg. Labor
Mfg. Overhead
Total cost
+
↓
Cost per unit
$0.75
0.50
1.50
$2.75
1
11 1 1 1
51 1 1 1 1
1 1 1
1 1 1 1
# 31 1

A
AMD
Example 3 (Continued)
Insourcing vs. Outsourcing Decisions
After summarizing the costs of producing silicon wafers at the AMD
factory, the company learned that $500,000 in fixed manufacturing
overhead costs can be eliminated if this component is outsourced (these
include engineering salaries and depreciation of production equipment).
●
1
Also, it is estimated that closing off the part of the plant where the silicon
wafers are produced would save $300,000 in electricity costs, which are
considered variable mfg. overhead costs.
• Should the silicon wafers be outsourced or manufacture internally in
the AMD factory?

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I was confused because the 300,000 said it was a variable mfg. overhead cost, based on the definition of variable costs, by outsourcing we should typically have 0 variable costs so could you explain how we save the 300,000?

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