Question

Spectra Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit: : (Click the icon to view the costs.) Another company has offered to sell Spectra Systems the switch for $17.50 per unit. If Spectra Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable. Prepare an outsourcing analysis to determine whether Spectra Systems should make or buy the switch. (For the Difference column, use a minus sign or parentheses only when the cost of outsourcing exceeds the cost of making the swithces in-house.) Make optical switch Outsource optical switch Difference (make-outsource) Variable costs: Data Table Direct materials Direct labor Variable overhead Direct Material Purchase price from outsider Direct Labor Total differential cost per unit Variable Overhead Fixed Overhead Decision: 21.50 Manufacturing Product Cost Print Done

Answer 1

	Make	Outsource	Difference
Variable costs:
Direct material	11.00		11.00
Direct labor	3.00		3.00
Variable overhead	2.00		2.00
Purchase price from outside		17.50	(17.50)
Total differential cost per unit	16.00	17.50	(1.50)

Decision :- Make

Reason :- Since the relevant cost of making is lower than the outsourcing cost, it is better to make in house than outsourcing.