Chapter 11, Problem 11.25E

Make versus buy, activity-based costing. 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 2017 and the expected costs in 2018:

	Current Costs in 2017	Expected Costs in 2018
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 2017 in 40 batches of 200 each. In 2018, 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 2018 at $300 per CMCB on whatever delivery schedule Svenson wants.

1. 1. Calculate the total expected manufacturing cost per unit of making CMCBs in 2018.

Required

1. 2. Suppose the capacity currently used to make CMCBs will become idle if Svenson purchases CMCBs from Minton. On the basis of financial considerations alone, should Svenson make CMCBs or buy them from Minton? Show your calculations.
2. 3. 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	$2,000,000
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.