EXERCISE 12-3 Make or Buy a Component ILO2] Current-Control Inc. manufactures a

Question

EXERCISE 12-3 Make or Buy a Component ILO2] Current-Control Inc. manufactures a variety of electrical switches. The company manufacturing all of its own component parts. An outside supplier has offered to sell to Current-Control for $32 per unit. To evaluate this offer, Current-Control has following information relating to its own cost of producing the switch internall is currently Per Unit 12,000 Units per Year $ 12 10 Direct materials Direct labour. Variable manufacturing overhead Fixed manufacturing overhead, traceable... Fixed manufacturing overhead, common, but allocated. Total cost.... $ 144000 120,000 36,000 96,000 192,000 $588,000 8* 16 $49 *25% supervisory salaries; 75% depreciation of special equipment (no resale value). Required: 1. Assuming that the company has no alternative use for the facilities now being used to produce the switch, should the outside supplier's offer be accepted? Show all computations. Suppose that if the switches were purchased, Current-Control could use the freed capac- ity to launch a new product. The segment margin of the new product would be $78.000 per year. Should Current-Control accept the offer to buy the switches from the outside supplier for $32 each? Show computations. 2.

Explanation / Answer

1) Differential analysis :

Outside supplier's offer should not be accepted.

2) Differential analysis :

Outside supplier's offer should be accepted.

Make Buy Direct material 144000 Direct labour 120000 Variable manufacturing overhead 36000 Fixed manufacturing overhead (96000*25%) 24000 Purchase cost (12000*32) 384000 Total 324000 384000

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