Fiber Systems manufactures an optical switch that it uses in its final product. Another company has offered to sell Fiber Systems the switch for $15.50 per unit. None of Fiber's fixed costs are avoidable. Fiber Systems needs 81,000 optical switches. By outsourcing them, Fiber Systems can use its idle facilities to manufacture another product that will contribute $220,000 to operating income.
Cost to Make Minus Make
Make Unit Buy Unit Cost to Buy
Incremental cost per unit:
Direct materials $11.00 11.00
Direct labor 2.00 2.00
Variable overhead 1.00 1.00
Purchase price from outsider 15.50 (15.50)
Incremental cost per unit $14.00 15.50 $(1.50)
Requirements
1.
Identify the incremental costs that Fiber
Systems will incur to acquire 81,000
switches under three alternative plans.
2.
Which plan makes the best use of Fiber
System's facilities? Support your answer.
