TechSystems manufactures an optical switch that it uses in its final product. TechSystems incurred the following manufacturing costs when it produced 66,000 units last year: A B 1 Direct materials $528,000 2 Direct labor 132,000 3 Variable MOH 198,000 4 Fixed MOH 462,000 5 Total manufacturing cost for 66,000 units $1,320,000 Another company has offered to sell TechSystems the switch for $11.00 per unit. If TechSystems buys the switch from the outside supplier, none of the fixed costs are avoidable. The company prepared an outsourcing decision analysis to show the cost per unit of making the switches versus the cost per unit of buying (outsourcing) the switches. TechSystems Incremental Analysis for Outsourcing Decision Make Buy Unit Unit Difference Variable cost per unit: Direct materials $8.00 $0.00 $8.00 Direct labor 2.00 0.00 2.00 Variable overhead 3.00 0.00 3.00 Purchase price from outsider 0.00 11.00 (11.00) Variable cost per unit $13.00 $11.00 $2.00 TechSystems needs 81,000 optical switches next year (assume same relevant range). By outsourcing them, TechSystems can use its idle facilities to manufacture another product that will contribute $110,000 to operating income, but none of the fixed costs will be avoidable. Should TechSystems make or buy the switches? Show your analysis.
TechSystems manufactures an optical switch that it uses in its final product. TechSystems incurred the following manufacturing costs when it produced 66,000 units last year: A B 1 Direct materials $528,000 2 Direct labor 132,000 3 Variable MOH 198,000 4 Fixed MOH 462,000 5 Total manufacturing cost for 66,000 units $1,320,000 Another company has offered to sell TechSystems the switch for $11.00 per unit. If TechSystems buys the switch from the outside supplier, none of the fixed costs are avoidable. The company prepared an outsourcing decision analysis to show the cost per unit of making the switches versus the cost per unit of buying (outsourcing) the switches. TechSystems Incremental Analysis for Outsourcing Decision Make Buy Unit Unit Difference Variable cost per unit: Direct materials $8.00 $0.00 $8.00 Direct labor 2.00 0.00 2.00 Variable overhead 3.00 0.00 3.00 Purchase price from outsider 0.00 11.00 (11.00) Variable cost per unit $13.00 $11.00 $2.00 TechSystems needs 81,000 optical switches next year (assume same relevant range). By outsourcing them, TechSystems can use its idle facilities to manufacture another product that will contribute $110,000 to operating income, but none of the fixed costs will be avoidable. Should TechSystems make or buy the switches? Show your analysis.
Chapter10: Short-term Decision Making
Section: Chapter Questions
Problem 3PB: Cinnamon Depot bakes and sells cinnamon rolls for $1.75 each. The cost of producing 500,000 rolls in...
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Question
TechSystems manufactures an optical switch that it uses in its final product. TechSystems incurred the following manufacturing costs when it produced 66,000 units last year:
|
A
|
B
|
1
|
Direct materials
|
$528,000
|
---|---|---|
2
|
Direct labor
|
132,000
|
3
|
Variable MOH
|
198,000
|
4
|
Fixed MOH
|
462,000
|
5
|
Total manufacturing cost for 66,000 units
|
$1,320,000
|
Another company has offered to sell TechSystems the switch for $11.00 per unit. If TechSystems buys the switch from the outside supplier, none of the fixed costs are avoidable. The company prepared an outsourcing decision analysis to show the cost per unit of making the switches versus the cost per unit of buying (outsourcing) the switches.
TechSystems
|
|||
Incremental Analysis for Outsourcing Decision
|
|||
|
Make
|
Buy
|
|
|
Unit
|
Unit
|
Difference
|
Variable cost per unit:
|
|
|
|
Direct materials
|
$8.00
|
$0.00
|
$8.00
|
Direct labor
|
2.00
|
0.00
|
2.00
|
Variable overhead
|
3.00
|
0.00
|
3.00
|
Purchase price from outsider
|
0.00
|
11.00
|
(11.00)
|
Variable cost per unit
|
$13.00
|
$11.00
|
$2.00
|
TechSystems needs 81,000 optical switches next year (assume same relevant range). By outsourcing them,
TechSystems can use its idle facilities to manufacture another product that will contribute $110,000 to operating income, but none of the fixed costs will be avoidable. Should TechSystems make or buy the switches? Show your analysis.
Complete the Best Use of Facilities Analysis.
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