Baron Company incurs the following annual costs in producing 25,000 ignition switches for motor scooters. Instead of making its own switches, Baron Company might purchase the ignition switches at a price of $9 per unit. And we assume that $50,000 of the fixed costs will remain (unavoidable) if the switches are purchased. Also, we assume that through buying the switches, Baron Company can use the released productive capacity to generate additional income of $87,000 from producing a different product. This lost income is an additional cost of continuing to make the switches in the make-or-buy decision. What should management do?

a

If Barron produces the switches by itself, manufacturing cost+ opportunity cost (we name it total cost 1) is $225,000. If Barron buys the switches from outsiders, total cost (we name it total cost 2) is $275,000. Since the total cost 1 is less than the total cost 2, Barron should produce the switches by itself.

b

If Barron produces the switches by itself, manufacturing cost+ opportunity cost (we name it total cost 1) is $312,000. If Barron buys the switches from outsiders, total cost (we name it total cost 2) is $275,000. Since the total cost 1 is greater than the total cost 2, Barron should buy the switches from outsiders.

c

If Barron produces the switches by itself, manufacturing cost+ opportunity cost (we name it total cost 1) is $87,000. If Barron buys the switches from outsiders, total cost (we name it total cost 2) is $275,000. Since the total cost 1 is less than the total cost 2, Barron should produce the switches by itself.

d

All the above statements are incorrect.

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs $ 50,000 75,000 40,000 60,000 $225,000