Fantasmic Productions manufactures an optical switch that is used in its final product. Fantasmic Productions incurred the following manufacturing costs last year when it produced 70,000 units

Per unit

Direct materials 9.00

Direct Labor 1.50

Variable factory overhead 2.00

Fixed factory overhead 6.50

$19.00

Fantasmic Productions has been approached by an outside supplier that has offered to supply the switches at a price of $13.50 per switch. Capacity now used to make the switches will become idle if the company purchases the switches.

Required:

ALL CALCULATIONS MUST BE SHOWN

1. Prepare a relevant cost schedule that indicates whether Fantasmic Productions should buy the switches or continue to make them.
2. Would you accept the outside suppliers offer? Tell why or why not.
3. Assume that Fantasmic can use the released production facilities in another manufacturing activity that will make a contribution to profits of $85,0000, would that change your decision?