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BestSystems manufactures an optical switch that it uses in its final product. BestSystems incurred the following manufacturing costs when it produced 73.000 units last year (Click the icon to view the manufacturing costs.) BestSystems does not yet know how many switches it will need this year, however another company has offered to sell BestSystems the switch for $14.50 per unit. If BestSystems 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. Read the requirements Requirement 1. Given the same cost structure, should BestSystems make or buy the switch? Show your analysis. Complete an incremental analysis to show whether BestSystems should make or buy the switch (Enter a "0" for any zero amounts. Round amounts to the nearest cent. Use a minus sign or parentheses when the cost to buy exceeds the cost to make.) BestSystems Incremental Analysis for Outsourcing Decision Make Buy Unit Unit Difference Variable cost per unit: (1) (2) (3) (4) Total variable cost per unit than the Decision: (5) because the variable cost per unit to make the switch is (6) variable cost per unit to buy the switch. Requirement 2. Now, assume that BestSystems can avoid $97,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, BestSystems needs 78,000 switches a year rather than 73,000 switches. What should the company do now? Complete an outsourcing decision analysis assuming fixed costs can be avoided by outsourcing production and the number of units needed have increased. Obame BestSystems Outsourcing Decision Make Buy switches switches (7) (8) (9) (10) Total relevant costs than the Decision: (11) because the total relevant costs to make the switches are (12) total relevant costs to buy the switches. Requirement 3. Given the last scenario, what is the most BestSystems would be willing to pay to outsource the switches? Begin by identifying the basic formula that is used to determine the indifferent outsourcing cost per unit. Cost if making switches (13) Cost if outsourcing switches (14) Using the basic formula you determined above, solve for the outsourcing cost at which BestSystems would be indifferent between outsourcing and making the switches. (Enter your per unit calculation to the nearest cent.) BestSystems would be indifferent between outsourcing and making the switches if the outsourcing cost was per Cost if making switches (13) Cost if outsourcing switches (14) Using the basic formula you determined above, solve for the outsourcing cost at which BestSystems would be indifferent between outsourcing and making the switches. (Enter your per unit calculation to the nearest cent.) BestSystems would be indifferent between outsourcing and making the switches if the outsourcing cost was per switch per switch. Therefore Systems will only be willing to outsource if the outsourcing cost is (15) 1: Data Table B 1 Direct materials $ 730,000 2 Direct labor 73,000 3 Variable MOH 146,000 511,000 4 Fixed MOH $ 1,460,000 5 Total manufacturing cost for 73,000 units 2. Requirements 1. Given the same cost structure, should BestSystems make or buy the switch? Show your analysis. 2. Now, assume that BestSystems can avoid $97,000 of fixed costs a year by putsourcing production. In addition, because sales are increasing, BestSystems needs 78,000 switches a year rather than 73,000 switches. What should the company do now? 3. Given the last scenario, what is the most BestSystems would be willing to pay to outsource the switches? (1) O Direct labor O Direct materials Fixed overhead Purchase price from outsider O Sales price O Variable overhead (2) O O Direct labor O Direct materials O Fixed overhead O Purchase price from outsider O Sales price Variable overhead (3) O O Purchase price from outsider Direct labor O Sales price O Direct materials O Variable overhead Fixed overhead (4) O Purchase price from outsider O Sales price Variable overhead (5) O Buy the optical switch Make the optical switch (6) O less greater Direct labor Direct materials (Fixed overhead OOOO 000 Contribution margin per unit Fixed costs Fixed cost per unit O Total variable costs (Units needed 0 Variable cost per unit (8) KOD Contribution margin per unit Fixed costs Fixed cost per unit CD Total variable costs 0 Units needed 0 Variable cost per unit (9) oooo Contribution margin per unit Fixed costs Fixed cost per unit O Total variable costs Units needed O Variable cost per unit (10) Total variable costs Units needed O Variable cost per unit (11) O Buy the optical switch O Make the optical switch Contribution margin per unit @ Fixed costs O Fixed cost per unit (13) (12) O less greater O Direct materials + Direct labor O Direct materials + Direct labor + Variable costs Sales revenue - Fixed costs O Sales revenue - Total costs Sales revenue - Variable costs O Variable costs + Fixed costs (14) 0 Direct materials + Direct labor Direct materials + Direct labor + Variable costs Sales revenue Fixed costs O Sales revenue - Total costs KD Sales revenue - Variable costs Variable costs + Fixed costs (15) equal O greater than O less than