Global Systems manufactures an optical switch that it uses in its final product. Global ­Systems incurred the following manufacturing costs when it produced 69,000 units last year:

Globle system does not yet know how many switches it will need this year; however, another company has offered to sell Global Systems the switch for $ 16.50 per unit. If Global Systems 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.

Requirements
1. Given the same cost structure, should Global Systems make or buy the switch? Show your analysis.
2. Now, assume that Global Systems can avoid $ 95,000 of fixed costs a year by out-sourcing production. In addition, because sales are increasing, Global Systems needs 74,000 switches a year rather than 69,000. What should Global Systems do now?
3. Given the last scenario, what is the most Global Systems would be willing to pay to outsource the switches?

Transcribed Image Text:

1 Direct materials 2 Direct abor 3 Variable MOH 4 Fixed MOH 5 Total manufacturing cost for 69,000 units 759,000 138,000 69,000 1414500