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

CoolSystems incurred the following manufacturing costs when it produced 65,000

units last year:

Direct materials - $585,000

Direct labor - 65,000

Variable MOH - 195,000

Fixed MOH- 455,000

Total manufacturing cost for 65,000 units = $1,300,000

Systems does not yet know how many switches it will need this year; however, another company has offered to sell CoolSystems the switch for $15.50 per unit. If CoolSystems 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.

Given the same cost structure, should CoolSystems make or buy the switch? Show your analysis.
2.	Now, assume that CoolSystems can avoid $105,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, CoolSystems needs 70,000 switches a year rather than 65,000 switches. What should the company do now?
3.	Given the last scenario, what is the most CoolSystems would be willing to pay to outsource the switches?