TechSystems manufactures an optical switch that it uses in its final product. TechSystems incurred the following manufacturing costs when it produced 69,000 units last year EEB(Click the icon to view the manufacturing costs.) TechSystems does not yet know how many switches it will need this year; however, another company has offered to sell TechSystems the switch for $13.50 per unit. If TechSystems 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 TechSystems make or buy the switch? Show your analysis Complete an incremental analysis to show whether TechSystems 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.) TechSystems Data Table Incremental Analysis for Outsourcing Decision Make Buy Unit Unit Difference Direct materials $ 552,000 Variable cost per unit: Direct labor 138,000 0.00 $ Direct materials 8.00 $ 8.00 Variable MOH 69,000 $ Direct labor 2.00 0.00 2.00 414,000 Fixed MOH Variable overhead 1.00 0.00 1.00 $ 1,173,000 Total manufacturing cost for 69,000 units 0.00 13.50 (13.50) Purchase price from outsider 11.00 $ 13.50 $ (2.50) Total variable cost per unit Print Done than the variable cost per unit to buy the switch Decision: Make the optical switch because the variable cost per unit to make the switch is less Requirement 2. Now, assume that TechSystems can avoid $102,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, TechSystems needs 74,000 switches a year rather than 69,000 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 TechSystems Data Table Outsourcing Decision Make Buy switches switches Direct materials $ 552,000 13.50 Variable cost per unit $ 11.00 $ Direct labor 138,000 74,000 74,000 Units needed Variable MOH 69,000 414,000 Total variable costs 814,000 999,000 Fixed MOH 414,000 312,000 $ 1,173,000 Fixed costs Total manufacturing cost for 69,000 units 1,228,000 $ 1,311,000 Total relevant costs Print Done Decision: Make the optical switch because the total relevant costs to make the switches are less than the total relevant costs to buy the switches. SWiLCTnes SWILCTIOS i Data Table Variable cost per unit $ 11.00 $ 13.50 74,000 74,000 Units needed Total variable costs 814,000 999,000 Direct materials $ 552,000 414,000 312,000 Fixed costs Direct labor 138,000 $ 1,228,000 $ 1,311,000 Total relevant costs Variable MOH 69,000 414,000 Decision: Make the optical switch because the total relevant costs to make the switches are less than the total relevant costs to buy the switches. Fixed MOH $ 1,173,000 Total manufacturing cost for 69,000 units Requirement 3. Given the last scenario, what is the most TechSystems 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. Print Done Cost if making switches Cost if outsourcing switches Variable costs Fixed costs Variable costs + Fixed costs Using the basic formula you determined above, solve for the outsourcing cost at which TechSystems would be indifferent between outsourcing and making the switches. (Enter your per unit calculation to the nearest cent.) TechSystems would be indifferent between outsourcing and making the switches if the outsourcing cost was $ per switch less than per switch. Therefore, Systems will only be willing to outsource if the outsourcing cost is $
