Reference no: EM132583360
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 Unit12,000 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 16 192,000
Total cost$49 $588,000
- 25% supervisory salaries; 75% depreciation of special equipment (no resale value).
Required:
Question 1: 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.
Make Buy
Total cost--12,000 units
Question 2: 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.