TechSystems manufactures an optical switch that it uses in its final product. TechSystems incurred the following manufacturing costs when it produced 66,000 units last year: A B 1 Direct materials $528,000 2 Direct labor 132,000 3 Variable MOH 198,000 4 Fixed MOH 462,000 5 Total manufacturing cost for 66,000 units $1,320,000 Another company has offered to sell TechSystems the switch for $11.00 per unit. If TechSystems buys the switch from the outside supplier, none of the fixed costs are avoidable. The company prepared an outsourcing decision analysis to show the cost per unit of making the switches versus the cost per unit of buying (outsourcing) the switches. TechSystems Incremental Analysis for Outsourcing Decision Make Buy Unit Unit Difference Variable cost per unit: Direct materials $8.00 $0.00 $8.00 Direct labor 2.00 0.00 2.00 Variable overhead 3.00 0.00 3.00 Purchase price from outsider 0.00 11.00 (11.00) Variable cost per unit $13.00 $11.00 $2.00 TechSystems needs 81,000 optical switches next year (assume same relevant range). By outsourcing them, TechSystems can use its idle facilities to manufacture another product that will contribute $110,000 to operating income, but none of the fixed costs will be avoidable. Should TechSystems make or buy the switches? Show your analysis.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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TechSystems manufactures an optical switch that it uses in its final product. TechSystems incurred the following manufacturing costs when it produced 66,000 units last year:

	A	B
1	Direct materials	$528,000
2	Direct labor	132,000
3	Variable MOH	198,000
4	Fixed MOH	462,000
5	Total manufacturing cost for 66,000 units	$1,320,000

Another company has offered to sell TechSystems the switch for $11.00 per unit. If TechSystems buys the switch from the outside supplier, none of the fixed costs are avoidable. The company prepared an outsourcing decision analysis to show the cost per unit of making the switches versus the cost per unit of buying (outsourcing) the switches.

TechSystems
Incremental Analysis for Outsourcing Decision
	Make	Buy
	Unit	Unit	Difference
Variable cost per unit:
Direct materials	$8.00	$0.00	$8.00
Direct labor	2.00	0.00	2.00
Variable overhead	3.00	0.00	3.00
Purchase price from outsider	0.00	11.00	(11.00)
Variable cost per unit	$13.00	$11.00	$2.00

TechSystems needs 81,000 optical switches next year (assume same relevant range). By outsourcing them,

TechSystems can use its idle facilities to manufacture another product that will contribute $110,000 to operating income, but none of the fixed costs will be avoidable. Should TechSystems make or buy the switches? Show your analysis.

Complete the Best Use of Facilities Analysis.

Expert Solution

Step 1: Introduction to make or buy decision

A "make or buy" analysis represents the strategic decision-making process which some of the manufacturing companies use to decide whether to manufacture or acquire specific goods or services from outside suppliers or vendors. This analysis assists firms in determining whether producing goods in-house or outsourcing them to third parties is more advantageous, efficient, and cost-effective.

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