Question

Eclipse Systems manufactures an optical switch that it uses in its final product. Another company has offered to sell Eclipse Systems the switch for $20.00 per unit. None of Eclipse's fixed costs are avoidable. (Click the icon to view the outsourcing decision.) Eclipse Systems needs 80,000 optical switches. By outsourcing them, Eclipse Systems can use its idle facilities to manufacture another product that will contribute $250,000 to operating income. Read the requirements. Requirement 1. Identify the expected net costs that Eclipse Systems will incur to acquire 80,000 switches under three alternative plans. i Data Table Outsource switches Facilities Make new Idle product Switch costs Make Make optical switch Outsource optical switch Difference (make-outsource) Variable costs: Direct materials 11.00 Variable costs: Direct materials Direct labor Variable manufacturing overhead Purchase cost Direct labor Variable overhead 4.50 6.00 11.00 4.50 6.00 (20.00) Purchase price from outsider 20.00 20.00 $ Expected profit contribution from the other product $ 21.50 $ 1.50 Differential cost per unit Total expected net cost of the optical switches i Requirements Print Done Enter any number in the edit fields and then click Check A part remaining 1. Identify the expected net costs that Eclipse Systems will incur to acquire 80,000 switches under three alternative plans. 2. Which plan makes the best use of Eclipse System's facilities? Support your answer. Check Answer

Answer 1

Expected Net cost that Eclipse Systems will incur to acquire 80,000 switches under three alternativ plans
		Outsource switches
Switch costs	Make	Facilities Idle	Make new product
Variable costs
Direct materials	880000
Direct labor	360000
Variable overhead	480000
Purchase cost		1600000	1600000
Expected profit contribution from other product			-250000
Total Expected Net cost of optical switches	1720000	1600000	1350000

Plan Outsource switches - making new product will give least net cost of optical switches to the company. So it should go for outsource switches and make new product.