Question

FiberSystems manufactures an optical switch that it uses in its final FiberSystems does not yet know how many switches it will need this year, product. FiberSystems incurred the following manufacturing costs when it however, another company has offered to sell FiberSystems the switch for produced 66,000 units last year: $13.50 per unit. If Fiber Systems buys the switch from the outside (Click the icon to view the manufacturing costs.) supplier, the manufacturing facilities that will be idle cannot be used for any other purpose, yet none of the fixed costs are avoidable. Read the requirements Requirement 1. Given the same cost structure, should Fiber Systems make or buy the switch? Show your analysis. Complete an incremental analysis to show whether Fiber Systems should make or buy the switch. (Enter a "O" for any zero amounts. Round amounts to the nearest cent. Use a minus sign or parentheses when the cost to buy exceeds the cost to make.) Fiber Systems Incremental Analysis for Outsourcing Decision Buy Make Unit Unit Difference Variable cost per unit: Direct materials Direct labor Variable overhead Purchase price from outsider Total variable cost per unit

Answer 1

Based on the information available in the question, we can answer as follows:-

Requirement 1:-

No. of units	66,000	66,000
Particulars	Make Unit	Buy Unit	Cost to Make minus cost to buy
Direct Materials	10	-	10.00
Direct Labor	2	-	2.00
Variable Overhead	3	-	3.00
Purchase price from outsider		13.50	(13.50)
Total Profit	15.00	13.50	1.50

Requirement 2:-

Total cost of producing 71,000 units :-

Make:-

71,000 units * $15 variable cost per unit = $1,065,000

+ Fixed manufacturing overheads = $396,000

Total costs = $1,461,000

Buy:-

71,000 units * $13.50 = $958,500

+ Fixed manufacturing overheads = $294,000

Total costs = $1,252,500

The company should buy the switches as it is cheaper.

Requirement 3:-

Cost of Making switches = Cost of Buying switches

(Variable cost per unit to make * No.of switches) + Fixed costs = (Cost to buy * No.of switches) + Fixed costs

($15 * 71,000 units) + $396,000 = (x * 71,000) +$294,000

$1,065,000 + $396,000 = 71,000x + $294,000

$1,065,000 + $396,000 - $294,000 = 71,000x

$1,167,000 = 71,000x

x = $16.44(Rounded)

The most that Fibernet would be willing to pay to outsource the switches is $16.44

Please let me know if you have any questions via comments and all the best :) !