Question

global systems manufactures an optical switch that it uses in its final product. Global systems incurred the following manufacturing costs when it produced 72,000 units last​ year

Systems

does not yet know how many switches it will need this​ year; however, another company has offered to sell

GlobalSystems the switch for $11.50 per unit. If GlobalSystems 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

DATA- manufacturing costs

Direct materials= $720,000

Direct labor= 144,000

Variable MOH =72,000

Fixed MOH =468,000

Total manufacturing cost for 72,000 units =$1,404,000

1.	Given the same cost​ structure, should GlobalSystems make or buy the​ switch? Show your analysis.
2.	​Now, assume that GlobalSystems can avoid $108,000 of fixed costs a year by outsourcing production. In​ addition, because sales are​ increasing, GlobalSystems needs 77,000 switches a year rather than 72,000 switches. What should the company do​ now?
3.	Given the last​ scenario, what is the most GlobalSystems would be willing to pay to outsource the​ switches?

GlobalSystems

Incremental Analysis for Outsourcing Decision

Make

Buy

Unit

Unit

Difference

Variable cost per unit:

Direct materials

Direct labor

Variable overhead

Purchase price from outsider

Total variable cost per unit

GlobalSystems

Incremental Analysis for Outsourcing Decision

Make

Buy

Unit

Unit

Difference

Variable cost per unit:

Direct materials

Direct labor

Variable overhead

Purchase price from outsider

Total variable cost per unit

Answer 1

REQUIREMENT 1 Make Unit Buy Unit Difference Variable Cost Per Unit Direct Materials $10.00 Direct Labour $2.00 Variable Overheads $1.00 Purchase Price From Outsider $11.50 Total Variable Cost Per Unit $13.00 $11.50 $1.50

Global Systems Should Buy The Switch Because Variable Cost Per Unit To BUY The Switch Is $1.50 Lower Than The Variable Cost Per Unit To BUY The Switch.

REQUIREMENT 2 Make Switches Buy Switches Difference Variable Cost Per Unit $13.00 $11.50 Units Needed 77000 77000 Total Variable Costs $10,01,000 $8,85,500 Fixed Costs $1,08,000 $0 Total Relevant Costs $11,09,000 $8,85,500 $2,23,500

Global Systems Should BUY The Switch Because The Total Relevant Costs To MAKE The Switches Are $2,23,500 Greater Than The Total Relevant Costs To Buy The Switch.

REQUIREMENT 3 Cost If Making Switches = Cost If Outsourcing Switches Variable Costs + Fixed Costs = Variable Costs + Fixed Costs (77000*$13)+ $4,68,000 = 77000*Outsourcing Cot Per Switch + $3,60,000 $14,69,000 = 77000*Outsourcing Cot Per Switch + $3,60,000 $14.40 = Outsourcing Cot Per Switch

Global Systems Would Be Indifferent Between Outsourcing And Making The Switches If The Outsourcing Cost Was $14.40 Per Switch. Therefore Systems Will Only Be Willing To Outsource(i.e. the most it would be willing to pay) If The Outsourcing Cost Is $14.40 Per Switch.