Make-or-buy product component (Learning Objective 6)

Fiber Systems manufactures an optical switch that it uses in its final product. Fiber Systems incurred the following manufacturing costs when it produced 70,000 units last year:

Fiber Systems does not yet know how many switches it will need this year; however, another company has offered to sell Fiber Systems the switch for $14 per unit. If Fiber Systems 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.
Requirements 1. Given the same cost structure, should Fiber Systems make or buy the switch? Show your analysis.
2. Now, assume that Fiber Systems can avoid $100,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, Fiber Systems needs 75,000 switches a year rather than 70,000. What should Fiber Systems do now?
3. Given the last scenario, what is the most Fiber Systems would be willing to pay to outsource the switches?

Transcribed Image Text:

Direct materials.... $ 630,000 Direct labor...... _ 105,000 Variable overhead.. Fixed overhead... 140,000 455,000 Total manufacturing cost for 70,000 units.. $1,330,000