EXERCISE $12-3$

Make or Buy a Component $[$ LO$2]$

Page $568$

Current$-$Control Inc. manufactures a variety of electrical switches. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a switch to Current$-$Control for $$32$ per unit. To evaluate this offer, Current$-$Control has gathered the following information relating to its own cost of producing the switch internally:

$\backslash$table$[[,$Per Unit,$\backslash$table$[[12,000$ Units$],[$per Year$]]],[$Direct materials,$ $12,$$$144,000],[$Direct labour,$10,120,000],[$Variable manufacturing overhead,$3,36,000],[$Fixed manufacturing overhead, traceable,$8*,96,000],[$Fixed manufacturing overhead, common, but allocated,$16,192,000],[$Total cost$,$$ $49,$$$588,000],[*25\%$ supervisory salaries; $75\%$ depreciation of special equipment $($no resale value$),,]]$

Required:

Assuming that the company has no alternative use for the facilities now being used to produce the switch, should the outside supplier's offer be accepted? Show all computations.

Suppose that if the switches were purchased, Current$-$Control could use the freed capacity to launch a new product. The segment margin of the new product would be $$78,000$ per year. Should Current$-$Control accept the offer to buy the switches from the outside supplier for $$32$ each? Show computations.