QUESTION 4 Make or Buy a Component Current-Control, Inc., manufactures a variety

ID: 2429479 • Letter: Q

Question

QUESTION 4 Make or Buy a Component Current-Control, Inc., manufactures a variety of electrical switches. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a switch to Current- Control for $32 per unit. To evaluate this offer, Current-Control, Inc., has gathered the following information relating to its own cost of producing the switch internally Per 12,000 Units Unit per Year Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, common, but allocated 16 Total cost $144,000 120,000 36,000 96,000 192,000 $12 10 8 $49 "25% supervisory salaries, 75% depreciation of special equipment value). no resale 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. 2 Suppose that if the switches were purchased, Current-Control, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be $78,000 per year. Should Current-Control, Inc., accept the offer to buy the switches from the outside supplier for $32 each? Show computations.

Explanation / Answer

1.Solution The company should make it and not buy from outside suppliers.

Make or buy decision so we need to compare the incremental cost to make with the incremental cost to buy.

Particulars

Incremental costs

Per unit ($)

Direct materials

$ 12

Direct labour

$ 10

Variable overheads

$ 3

Supervisory salaries

$ 2

Total Cost

$ 27

Comparing the cost of making the 12,000 switches i.e $ 27 per unit with the cost of buying I.e $ 32 per unit. There is a Net Loss of $ 5 per unit if they choose to buy the switches.

2.If the freed capacity which was previously used for manufacture of switches could be used to launch another new product. The segment margin of the new product would be $ 78,000.

Current Control Inc would face an opportunity cost associated with manufacturing the switches in-house for the 12,000 units of $ 6.5 per unit.

New Cost to Make= $ 27+ $6.5= $ 33.5 per unit

Now the Company should buy because the cost to make is $ 33.5 per unit is higher than the cost to buy which is $ 32 per unit.