Chapter 8, Problem 8.28AE

Make-or-buy product component (Learning Objective 6)

InteliSystems manufactures an optical switch that it uses in its final product. InteliSystems incurred the following manufacturing costs when it produced 70,000 units last year:

8.1-26 Full Alternative Text

InteliSystems does not yet know how many switches it will need this year; however, another company has offered to sell InteliSystems the switch for $8.50 per unit. If InteliSystems 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.

Requirements

1. 1. Given the same cost structure should InteliSystems make or buy the switch? Show your analysis.
2. 2. Now, assume that InteliSystems can avoid $105,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, InteliSystems needs 75,000 switches a year rather than 70,000 switches. What should the company do now?
3. 3. Given the last scenario, what is the most InteliSystems would be willing to pay to outsource the switches?