ABC Inc. manufactures a variety of electrical switches. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a switch to ABC for $32 per unit. To evaluate this offer, ABC has gathered the following information relating to its own cost of producing the switch internally:

	Per Unit	12,000 Units per Year
Direct materials	$12	$144,000
Direct labour	10	120,000
Variable manufacturing overhead	3	36,000
Fixed manufacturing overhead	8*	96,000
Total cost	$33	$396,000
*25% supervisory salary, 75% depreciation of special equipment (no resale value)

Instructions

(a) Assuming that the company has no alternative use for the facilities now being used to produce the switch, should the outside suppliers offer be accepted? Show all calculations.

(b) Suppose that if the switches were purchased, ABC could use the freed capacity to launch a new product. The segment margin of the new product would be $78,000 per year. Should ABC accept the offer to buy the switches from the outside supplier for $32 each? Show all calculations.