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.

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

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.

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

Accept