TechSystem manufactures an optical switch that it uses in its final product. TechSystems incurred the following manufacturing costs when it produced 68,000 units last year:

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 Tech- 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.

1. Given the same cost structure, should TechSystems make or buy the switch? Show your analysis.
2. Now, assume that TechSystems can avoid $ 97,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, TechSystems needs 73,000 switches a year rather than 68,000 switches. What should the company do now?
3. Given the last scenario, what is the most TechSystems would be willing to pay to ­outsource theswitches?

  • CreatedAugust 27, 2014
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