E$3$ Q$19$ FiberSystems manufactures an optical switch that it uses in its final product. FiberSystems incurred the following manufacturing costs when it produced $74,000$ units last year:

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 FiberSystems make or buy the switch? Show your analysis.

the cost to make.$)$

FiberSystems

Incremental Analysis for Outsourcing Decision

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.

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.

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.

FiberSystems

Outsourcing Decision

switches switches

Total relevant costs

Decision:

longrightarrow

because the total relevant costs to make the switches are

Manufacturing costs

Requirement $3.$ Given the last scenario, what is the most FiberSystems 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.

FiberSystems 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

Requirements

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

Show your analysis.

Now, assume that FiberSystems can avoid $$102,000$ of fixed costs a year by

outsourcing production. In addition, because sales are increasing.

FiberSystems needs $79,000$ switches a year rather than $74,000$ switches. What

should the company do now?

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

to outsource the switches?