Question

Differential cost $(1.00) Cool Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit: Direct materials $ 5.00 Direct labor 3.00 Variable overhead 6.00 Fixed overhead 7.00 Manufacturing product cost $ 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 facilities 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.

Answer 1

Cool System should choose to Make the switch.

Step-by-step explanation:

Outsourcing analysis which considers only the relevant variable cost per unit can be prepared as follows:

Details Make ($) Outsource ($) Difference ($)

A B C = A - B

Direct materials 5.00 5.00

Direct labor 3.00 3.00

Variable overhead 6.00 6.00

Outsourcing price 15.00 –15.00

Total differential 14.00 15.00 –1.00

The analysis above shows that the total differential per unit is minus $1 which indicates that outsourcing is $1 per unit more expensive than make. Therefore, Cool System should choose to Make the switch.