RootSystems manufactures an optical switch that it uses in its final product. RootSystems

incurred the following manufacturing costs when it produced $70,000$ units last year:

Direct materials

$$560,000$

Direct labor

$175,000$

Variable MOH

$210,000$

Fixed MOH

$385,000$

Total manufacturing cost for $70,000$ units

$$1,330,000$

RootSystems does not yet know how many switches it will need this year; however, another company has offered to sell RootSystems the switch for $$10\mathrm{.}50$ per unit. If RootSystems

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

RootSystems

make or buy the switch? Show your analysis.

$2.$ Now, assume that

RootSystems

can avoid

$$97,000$

of fixed costs a year by outsourcing production. In addition, because sales are increasing,

RootSystems

needs

$75,000$

switches a year rather than

$70,000$

switches. What should the company do now?

$3.$ Given the last scenario, what is the most

RootSystems

would be willing to pay to outsource the switches?

Requirement $1.$ Given the same cost structure, should RootSystems make or buy the switch? Show your analysis. Complete an incremental analysis to show whether RootSystems

should make or buy the switch. $($Enter a $"0"$ for any zero amounts. Round amounts to the nearest cent. Use a minus sign or parentheses when the cost to buy exceeds the cost to make.$)$