TechSystems manufactures an optical switch that it uses in its final product. TechSystems incurred the following manufacturing costs when it produced 71,000 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 \($18.50\) 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.

Requirements:

1. Given the same cost structure, should TechSystems make or buy the switch? Show your analysis.
2. Now, assume that TechSystems can avoid \($95,000\) of fixed costs a year by outsourcing production. In addition, because sales are increasing, TechSystems needs 76,000 switches a year rather than 71,000. What should TechSystems do now?
3. Given the last scenario, what is the most TechSystems would be willing to pay to outsource the switches?

A B C D 1 Direct materials 2 Direct labor $ 781,000 142,000 3 Variable MOH 213,000 4 Fixed MOH 390,500 5 Total manufacturing cost for 71,000 units $ 1,526,500 6