Current-Control 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 Current-Control for $32 per unit. To evaluate this offer, Current-Control has gathered the following information relating to its own cost of producing the switch internally:

Per Unit12,000 Units

per YearDirect materials$12$144,000Direct labour10120,000Variable manufacturing overhead336,000Fixed manufacturing overhead, traceable8*96,000Fixed manufacturing overhead, common, but allocated16192,000Total cost$49$588,000

*25% supervisory salaries; 75% depreciation of special equipment (no resale value).

Required:

1-a.Assuming that the company has no alternative use for the facilities now being used to produce the switch, compute the total cost of making and buying the parts.

Total Cost (12,000 units) Make ??? Buy???

1-b.Should the outside supplier's offer be accepted?

• Accept
• Reject

2-a.Suppose that if the switches were purchased, Current-Control could use the freed capacity to launch a new product. The segment margin of the new product would be $78,000 per year. Compute the total cost of making and buying the parts.

Total Cost (12,000 units) Make ??? Buy???

2-b.Should Current-Control accept the offer to buy the switches from the outside supplier for $32 each?

• Accept
• Reject