FiberSystems manufactures an optical switch that it uses in its final product. FiberSystems incurred the following manufacturing costs when it produced 69,000 units last year:

Systems does not yet know how many switches it will need this year; however, another company has offered to sell FiberSystems the switch for $15.00 per unit. If FiberSystems buys the switch from the outside supplier, the manufacturing facilities that will be idle cannot be used for any other purpose, yet none of the fixed costs are avoidable.

1. Direct materials: $552,000

2. Direct labor: 172,500

3. Variable MOH: 138,000

4. Fixed MOH: 483,000

5. Total manufacturing cost for 69,000 units: $1,345,500

Requirements:

1.	Given the same cost structure, should FiberSystems make or buy the switch? Show your analysis.
2.	Now, assume that FiberSystems can avoid $97,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, FiberSystems needs 74,000 switches a year rather than 69,000 switches. What should the company do now?
3.	Given the last scenario, what is the most FiberSystems would be willing to pay to outsource the switches?

FiberSystems
Incremental Analysis for Outsourcing Decision
	Make Unit	Buy Unit	Difference
Variable cost per unit:
Direct materials	________	_______	________
Direct labor	________	_______	________
Variable overhead	________	_______	________
Purchase price from outsider	________	15.00	(15.00)
Total variable cost per unit	_______	$15.00	________