Question

please answer exercises 28A and 29A. For 29A, refer back to 28A for information.

E8-28A Make-or-buy product component (Learning Objective 6) InteliSystems manufactures an optical switch that it uses in its final product. InteliSystems incurred the following manufacturing costs when it produced 70,000 units last year: 1 2 3 4 5 Direct materials Direct labor Variable MOH Fixed MOH Total manufacturing cost for 70,000 units 560,000 105,000 70,000 455,000 1,190,000 $ InteliSystems does not yet know how many switches it will need this year; how- ever, another company has offered to sell InteliSystems the switch for $8.50 per unit. If InteliSystems 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. Requirements 1. Given the same cost structure, should InteliSystems make or buy the switch? Show your analysis. 2. Now, assume that InteliSystems can avoid $105,000 of fixed costs a year by outsourc- ing production. In addition, because sales are increasing, InteliSystems 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 inteliSystems would be willing to pay to out- source the switches?

Answer 1

Relevant cost of making are the avoidable costs
Direct material	8
Direct Labor	1.5
Variable MOH	1
Variable cost per unit	10.5
Purchase Price =$8.50
Buy, as cost of buying is lower
2.Buy, since incremental benefit
3.Most it would be willing tp pay is equal to costs avoided + margin earned
=10.5*75000+105000
i.e. $892,500 or $11.9 per switch
29A Buy, since buying cost is lower than make