James Lighting manufactures switches that it uses in several of its products. Management is considering whether to continue manufacturing the switches or to buy them from an outside source.The following information is available:

1. The company needs 100,000 switches per year. Switches can be purchased from an outside supplier at a cost of $4 per unit.

2. The cost of manufacturing switches is $5 per unit, computed as follows:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000

Manufacturing overhead:

Variable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000

Fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000

Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500,000

Cost per unit ($500,000 / 100,000 units) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.00

3. Discontinuing the manufacture of the switches will eliminate all of the direct materials and direct labor costs but will eliminate only 70 percent of the variable overhead costs.

4. If the switches are purchased from an outside source, certain machinery used in the production process would no longer have to be leased. Accordingly, $19,000 of fixed overhead costs could be avoided. No other reduction will result from discontinuing production of the switches.