manufactures an optical switch that it uses in its final product. CoolSystems incurred the following
manufactures an optical switch that it uses in its final product. CoolSystems incurred the following manufacturing costs when it produced 70,000 units last year:
Direct materials-$770,000
Direct labor -$140,000
Variable MOH- $210,000
Fixed MOH -$455,000
Total manufacturing cost for 70,000 units -$1,575,000
CoolSystems does not yet know how many switches it will need this year; however, another company has offered to sell
CoolSystems the switch for $18.00 per unit. If CoolSystems buys the switch from the outside supplier, the manufacturing facilities that will be idle cannot be used for any other purpose, yet none of the fixed costs are avoidable.
Requirement 1:
Requirement 1. Given the same cost structure, should CoolSystems make or buy the switch? Show your analysis. Complete an incremental analysis to show whether CoolSystems should make or buy the switch. (Enter a “0” for any zero amounts. Round amounts to the nearest cent. Use a minus sign or parentheses when the cost to buy exceeds the cost to make.) ALREADY DONE BELOW
Variable cost per unit: MAKE UNIT BUY UNIT DIFFERENCE
Direct materials $11.00 $0.00 $11.00
Direct labor 2.00 0.00 2.00
Variable overhead 3.00 0.00 3.00
Purchase price from outsider 0.00 18.00 (18.00)
Total variable cost per unit $16.00 $18.00 $(2.00)
Requirement 2. Now, assume that
CoolSystems can avoid $99,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing,
CoolSystems needs 75,000 switches a year rather than 70,000 switches. What should the company do now?
Complete an outsourcing decision analysis assuming fixed costs can be avoided by outsourcing production and the number of units needed have increased. RELEVANT COSTS MAKE EST COST FOR 75,000 UNITS BUY EST COST FOR 75,000 UNITS PURCHASE PRICE OF SWITCH VARIABLE COST PER SWITCH MULTIPLY: # OF UNITS TOTAL VARIABLE COSTS OR PURCHASE PRICE ADD: FIXED COSTS TOTAL RELEVANT COSTS:
