Current-Control Inc. manufactures a variety of electrical switches. The company

Question

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 has gathered the following information relating to its own cost of producing the switch internally:

Assuming that the company has no alternative use for the facilities now being used to produce the switch, compute the total cost of making and buying the parts.

Should the outside supplier’s offer be accepted?

Suppose that if the switches were purchased, Current-Control could use the freed capacity to launch a new product. The segment margin of the new product would be $78,000 per year. Compute the total cost of making and buying the parts.

Should Current-Control accept the offer to buy the switches from the outside supplier for $32 each?

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 has gathered the following information relating to its own cost of producing the switch internally:

Explanation / Answer

1 Per unit Total Make Buy Make Buy Direct materials 12 144000 Direct labor 10 120000 Variable manufacturing overhead 3 36000 Fixed manufacturing overhead traceable 2 24000 Purchase cost 32 384000 Total 324000 384000 Make Buy Total relevant cost 324000 384000 1b Reject 2a Make Buy Total cost 324000 384000 Opportunity cost 78000 Total relevant cost 402000 384000 2b Accept

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