EXERCISE $12-3$ Make or Buy a Component $[$L$02]$

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:

Per $12,000$ Units

Unit per Year

Direct materials $...........................................$

Direct labour $.............................................$

Variable manufacturing overhead $.............................$

Fixed manufacturing overhead, traceable $.......................$

Fixed manufacturing overhead, common, but allocated $............$

Total cost. $...............................................$

$$12$

$10$

$3$

$8*$

$16$

$$49$

$*25\%$ supervisory salaries; $75\%$ depreciation of special equipment $($no resale value$)$

Required:

$$144,000$

$120,000$

$36,000$

$96,000$

$192,000$

$$588,000$

I. 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.

$2.$ 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 CurrentControl

accept the offer to buy the switches from the outside supplier for $$32$ each? Show computations.