Reference no: EM132511056

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:

Per Unit 12,000 Units

per Year Direct materials$12                         $144,000

Direct labour 10                                         120,000

Variable manufacturing overhead 3                      36,000

Fixed manufacturing overhead, traceable 8                     96,000

Fixed manufacturing overhead, common, but allocated 16 1        92,000

Total cost$49                                                                        $588,000

• 25% supervisory salaries; 75% depreciation of special equipment (no resale value).

Required:

Question 1-a. 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.

Question 1-b. Should the outside supplier's offer be accepted?

Question 2-a. 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.

Question 2-b. Should Current-Control accept the offer to buy the switches from the outside supplier for $32 each?