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Fiber Systems: make or buy the switch?

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Fiber Systems manufactures an optical switch that is uses in its final product. Fiber System incurred the following manufacturing costs when it produced 70,000 units last year:

Direct materials Direct labor Variable overhead Fixed overhead Total manufacturing cost for 70,000 units

RM630,000 105,000 140,000 455,000 RM1,330,000

Fiber Systems does not yet know how many switches it will need this year, however, another company has offered to sell Fiber Systems the switch for RM14 per unit. If Fiber Systems buys the switch from the outside supplier, the manufacturing facilities that will be idle cannot be used for any other purpose, yet none of the fixed costs are avoidable.

REQUIRED:

a.) Given the same cost structure, should Fiber Systems make or buy the switch?
Show your analysis.

b.) Now, assume that Fiber Systems can avoid RM100,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, Fiber Systems needs 75,000 switches a year rather than 70,000. What should Fiber Systems do now?

c.) Given the last scenario, what is the most Fiber Systems would be willing to pay to outsource the switches?

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Solution Summary

Your tutorial, including coaching remarks, is attached. This is a "make-or-buy" decision (not a standard costing problem). The analysis should compare what you save by buying it to the cost of buying it.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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