8#5

manufactures an optical switch that it uses in its final product.

InteliSystems

incurred the following manufacturing costs when it produced

66,000

units last year:

LOADING...

(Click the icon to view the manufacturing costs.)Read the requirements

LOADING...

.

.....

InteliSystems

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

InteliSystems

the switch for

$11.50

per unit. If

InteliSystems

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. Given the same cost structure, should

InteliSystems

make or buy the switch? Show your analysis.Complete an incremental analysis to show whether

InteliSystems

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.)

WorldSystems
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

Decision:

Buy the optical switch

because the variable cost per unit to make the switch is

greater

than the variable cost per unit to buy the switch. Requirement 2. Now, assume that

WorldSystems

can avoid

of fixed costs a year by outsourcing production. In addition, because sales are increasing,

WorldSystems

needs

switches a year rather than

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.

WorldSystems
Outsourcing Decision
	Make	Buy
	switches	switches
Variable cost per unit
Units needed
Total variable costs
Fixed costs
Total relevant costs

Decision:

Buy the optical switch

because the total relevant costs to make the switches are

greater

than the total relevant costs to buy the switches.Requirement 3. Given the last scenario, what is the most

WorldSystems

would be willing to pay to outsource the switches?

Begin by identifying the basic formula that is used to determine the indifferent outsourcing cost per unit.

Cost if making switches	=	Cost if outsourcing switches
Variable costs + Fixed costs	=	Variable costs + Fixed costs

Using the basic formula you determined above, solve for the outsourcing cost at which

WorldSystems

would be indifferent between outsourcing and making the switches. (Enter your per unit calculation to the nearest cent.)

WorldSystems would be indifferent between outsourcing and making the switches if the outsourcing cost was
per switch. Therefore, Systems will only be willing to outsource if the outsourcing cost is	l			.

Data table

Dialog content starts

	A	B
1	Direct materials	$726,000
2	Direct labor	66,000
3	Variable MOH	198,000
4	Fixed MOH	363,000
5	Total manufacturing cost for 66,000 units	$1,353,000