Refer to Exercise E25-18. Eclipse Systems needs 80,000 optical switches. By outsourcing them, Eclipse Systems can use its idle facilities to manufacture another product that will contribute $250,000 to operating income.
In Exercise 25.18
Eclipse Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:
Direct Materials..................................$ 11.00
Direct Labor....................................... 4.50
Variable Overhead............................. 6.00
Fixed Overhead................................. 8.00
Manufacturing Product Cost.............$ 29.50
Another company has offered to sell Eclipse Systems the switch for $20.00 per unit. If Eclipse Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable.
Prepare an outsourcing analysis to determine whether Eclipse Systems should make or buy the switch.
Requirements
1. Identify the expected net costs that Eclipse Systems will incur to acquire 80,000 switches under three alternative plans.
2. Which plan makes the best use of Eclipse System’s facilities? Support your answer.