W E8-26A (similar to) Question Help Tech Systems manufactures an optical switch that it uses in its final product. Tech Systems incurred the following manufacturing costs when it produced 67,000 units last year: (Click the icon to view the manufacturing costs.) Tech Systems does not yet know how many switches it will need this year, however, another company has offered to sell Tech Systems the switch for $13.50 per unit. If Tech Systems buys the switch from the outside supplier, the manufacturing facilities that become idle cannot be used for any other purpose, yet none of the fixed costs are avoidable. Requirements 1. Given the same cost structure, should Tech Systems make or buy the switch? Show your analysis. 2. Now, assume that Tech Systems can avoid $86,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, Tech Systems needs 72,000 switches a year rather than 67,000. What should Tech Systems do now? 3. Given the last scenario, what is the most Tech Systems would be willing to pay to outsource the switches? 3 Variable cost per unit $ $ 12.00 72,000 13.50 72,000 Units needed Total variable costs 864,000 368,500 972,000 282,500 Fixed costs $ 1,232,500 $ 1,254,500 Total relevant costs 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. Requirement 3. Given the last scenario, what is the most Tech Systems would be willing to pay to outsource the switches? (Round your answer to the nearest cent.) per switch. Therefore, Tech Systems will only be willing to outsource if the outsourcing cost is less than $ Tech Systems would be indifferent between outsourcing and making the switches if the outsourcing cost was $ per switch 0 Manufacturing costs - X Direct materials Direct labour........... Variable overhead............ Fixed overhead 603,000 67,000 134,000 368,500 1,172,500 $ Total manufacturing cost for 67,000 units Print Done