Question

3-6-13560 - Manage Save mework: Chapter 08 Graded Homework HW Score: 76.4%, 2 of 30 pts ke: 0 of 6 pts 4 of 5 (4 complete) Question Help 5-28A (similar to) Slobrystems manufactures an optical switch that it uses in its final product GlobalSystems incurred the Hollowing mandaduring costs when it produced 08.000 units last year Bill Click the icon to view the manufacturing Co .) Global Systems does not yet know how many switches it will need this year, however, another company has offered to sell Global Systems the switch for $16.00 perunt. If GlobalSystems bus me switch from the outside supplier, the manufacturing facilities that will be die cannot be used for any other purpose, yet none of the fixed costs are avoidable i Data Table Read the womens Requirement 1. Given the same cost structure, vous Global Systems make or buy the switch? Show your analysis Complete W ental analysis to show whether Global Systems should make or buy the switch (Enter a "o for any zero amounts Round am to buy exceeds the con to make 690,000 102.000 Direct materials Direct labor Variable MOH Fred MOH Globallystems Incremental Analysis for Outsourcing Decision 1 Requirements Totalare con per 1. Given the same cost structure should b e make or buy the switch Show your 2. No assume that sents can o 000 b y cu n g production Indon, because we are increasing W houd the company do now 3. C he a ts the most Goals bewing to and then click Check Ans Check Answer ana 5 m TYD OP

Answer 1

1. Make or Buy Problem

	Make		Buy
	68000 units	Per unit	Per unit
Purchase Cost	0	0	16
Direct Materials	680,000	10	0
Direct Labor	102,000	2	0
Variable MOH	68,000	1	0
Total Variable Cost	850,000	13	16
Fixed MOH	408,000	-	408,000
Total Cost	2,108,000	31

From the above table, it can be concluded that Variable cost of one switch is $13 and the fixed cost is $408,000. Also it should be considered that purchase cost for switch is $16.

If the switch is purchased from outside, then the production facility will not be used for any other purpose. Hence, this is indifferent cost and hence should not be considered while decision making. Therefore for the make or buy decision, only the variable cost should be considered.

Therefore the switch should be manufactured in house because the variable cost of producing the switch is lower than the purchase cost.

2. If the requirement is 73000 units

	Make	Buy
	73,000 units	73,000 units
Purchase Cost	0	1,168,000
Direct Materials	730,000	0
Direct Labour	146,000	0
Variable MOH	73,000	0
Total Variable Cost	949,000	1,168,000
Fixed MOH	408,000	303,000
Total Cost	1,357,000	1,471,000

Even if GlobalSystems manages to reduce the cost by 105,000, then also producing the switch is better option because the cost involved in production is less then the cost if the switches are purchases. The same can be explained through the table above.

3. Considering the last scenerio, the option of purchase of switch costs GlobalSystems more than by $114,000 considering all the variable and fixed costs. Therefore the Minimum price that should GlobalSystem agree to pay for purchase of the switch is $16 - $114,000 = $14.438 per switch.