global systems manufactures an optical switch that it uses in its final product. Global systems incurred the following manufacturing costs when it produced 72,000 units last year

Systems

does not yet know how many switches it will need this year; however, another company has offered to sell

GlobalSystems the switch for $11.50 per unit. If GlobalSystems 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

DATA- manufacturing costs

Direct materials= $720,000

Direct labor= 144,000

Variable MOH =72,000

Fixed MOH =468,000

Total manufacturing cost for 72,000 units =$1,404,000

1.	Given the same cost structure, should GlobalSystems make or buy the switch? Show your analysis.
2.	Now, assume that GlobalSystems can avoid $108,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, GlobalSystems needs 77,000 switches a year rather than 72,000 switches. What should the company do now?
3.	Given the last scenario, what is the most GlobalSystems would be willing to pay to outsource the switches?

GlobalSystems

Incremental Analysis for Outsourcing Decision

Make

Buy

Unit

Unit

Difference

Variable cost per unit:

Direct materials

Direct labor

Variable overhead

Purchase price from outsider

Total variable cost per unit

GlobalSystems

Incremental Analysis for Outsourcing Decision

Make

Buy

Unit

Unit

Difference

Variable cost per unit:

Direct materials

Direct labor

Variable overhead

Purchase price from outsider

Total variable cost per unit