CoolSystems manufactures an optical switch that it uses in its final product. CoolSystems does not yet know how many switches it will need this year; CoolSystems incurred the following manufacturing costs when it produced 65.000 however, another company has offered to sell CoolSystems the switch for $14.50 units last year: per unit. If CoolSystems buys the switch from the outside supplier, the E: (Click the icon to view the manufacturing costs.) manufacturing facilities that will be idle cannot be used for any other purpose, yet none of the fixed costs are avoidable. Read the requirements Requirement 1. Given the same cost structure, should CoolSystems make or buy the switch? Show your analysis. Complete an incremental analysis to show whether CoolSystems 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.) CoolSystems Incremental Analysis for Outsourcing Decision Make Buy Unit Unit Difference Variable cost per unit: Total variable cost per unit Decision: because the variable cost per unit to make the switch is than the variable cost per unit to buy the switch. Requirement 2. Now, assume that CoolSystems can avoid $100,000 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? Complete an outsourcing decision analysis assuming fixed costs can be avoided by outsourcing production and the number of units needed have increased. CoolSystems Outsourcing Decision Make Buy switches switches Total relevant costs Decision: because the total relevant costs to make the switches are than the total relevant costs to buy the switches Requirement 3. Given the last scenario, what is the most CoolSystems 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 Using the basic formula you determined above, solve for the outsourcing cost at which CoolSystems would be indifferent between outsourcing and making the switches. (Enter your per unit calculation to the nearest cent.) CoolSystems 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 per switch A B $ 1 Direct materials 2 Direct labor 3 Variable MOH 4 Fixed MOH 585,000 65,000 195,000 357,500 $ 5 Total manufacturing cost for 65,000 units 1,202,500 1. Given the same cost structure, should CoolSystems make or buy the switch? Show your analysis. 2. Now, assume that CoolSystems can avoid $100,000 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
