Question

CoolSystems manufactures an optical switch that it uses in its final product.

CoolSystems incurred the following manufacturing costs when it produced 65,000

units last​ year:

Direct materials - $585,000

Direct labor - 65,000

Variable MOH - 195,000

Fixed MOH- 455,000

Total manufacturing cost for 65,000 units = $1,300,000

Systems does not yet know how many switches it will need this​ year; however, another company has offered to sell CoolSystems the switch for $15.50 per unit. If CoolSystems 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.

Given the same cost​ structure, should CoolSystems make or buy the​ switch? Show your analysis.
2.	​Now, assume that CoolSystems can avoid $105,000 of fixed costs a year by outsourcing production. In​ addition, because sales are​ increasing, CoolSystems needs 70,000 switches a year rather than 65,000 switches. What should the company do​ now?
3.	Given the last​ scenario, what is the most CoolSystems would be willing to pay to outsource the​ switches?

Answer 1