E25-18 Making outsourcing decisions Cool Svstems manufactures an optical switch

Question

E25-18 Making outsourcing decisions Cool Svstems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit: Direct material:s Direct labor Variable overhead Fixed overhead Manufacturing product cost $ 5.00 3.00 6.00 7.00 $21.00 Another company has offered to sell Cool Systems the switch for $15.00 per unit. If Cool Systems buys the switch from the outside supplier, the idle manufacturing facili- ties cannot be used for any other purpose, yet none of the fixed costs are avoidable. Prepare an outsourcing analysis to determine whether Cool Systems should make or buy the switch

Explanation / Answer

Prepare outsourcing analysis :

Company should make the product.

make Buy Direct material 5 Direct labour 3 Variable manufacturing overhead 6 Purchase cost 15 Total 14 15

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