E8-41B:

E8-42B:

Tech Systems manufactures an optical switch that it uses in its final product. Tech Systems incurred the following manufacturing costs when it produced 68,000 units last year: Direct materials $ 680,000 Direct labour 136,000 Variable overhead 68,000 Fixed overhead 386,000 Manufacturing cost for 68,000 units $1,270,000 Refer to E8-41B. Tech Systems needs 80,000 optical switches next year (assume same relevant range). By outsourcing them, Tech Systems can use its idle facilities to manufacture another product that will contribute $130,000 to operating income, but none of the fixed costs will be avoidable. Should Tech Systems make or buy the switches? Show your analysis. Tech Systems Incremental Analysis for Outsourcing Decision Make Unit Buy Unit Cost to Make Minus Cost to Buy Variable cost per unit: Direct materials $10.00 $ - $ 10.00 Direct labour 2.00 2.00 Variable overhead 1.00 1.00 Purchase price from outsider 11.00 _(11.00) Variable cost per unit $13.00 $11.00 $ 2.00