QUESTION ONE

Make or Buy a Component

Current Control Inc manufactures a variety of electrical switches The company is currently manufacturing all of its own component parts An outside supplier has offered to sell a switch to Current Control for $32 per unit To evaluate this offer, Current Control Inc has gathered the following information relating to its own cost of producing the switch internally:

Per12,000 Units

Unitper Year

Direct materials $12$144,000

Direct labour10120,000

Variable manufacturing overhead336,000

Fixed manufacturing overhead traceable8*96,000

Fixed manufacturing overhead common but allocated 16192,000

Total cost $49 $588,000

*25% supervisory salaries 75% depreciation of special equipment (no resale value)

Required:

1. Assuming that the company has no alternative use for the facilities now being used to produce the switch, should the outside supplier's offer be accepted? Show all computations.

2. Suppose that if the switches were purchased Current Control Inc could use the freed capacity to launch a new product. The segment margin of the new product would be $78,000 per year. Should Current Control Inc accept the offer to buy the switches from the outside supplier for $32 each? Show computations