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:

$($Click the icon to view the manufacturing costs.$)$

Read the requirements.

CoolSystems does not yet know how many switches it will need this year; however, another

company has offered to sell CoolSystems the switch for $$12\mathrm{.}00$ 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.

Requirement $1.$ Given the same cost structure, should CoolSystems make or buy the switch? Show your analysis.

the cost to buy exceeds the cost to make.$)$

CoolSystems

Incremental Analysis for Outsourcing Decision

Requirements

Given the same cost structure, should CoolSystems make or buy the switch?

Show your analysis.

Now, assume that CoolSystems can avoid $$108,000$ 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?

Given the last scenario, what is the most CoolSystems would be willing to

pay to outsource the switches?