Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

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.

Short Answer

Expert verified

The company shouldmake the product in-house.

Step by step solution

01

Meaning of Avoidable Fixed Cost

Avoidable fixed cost refers to the expenses that are not required to be incurred by acompany if the production does not occur. In addition, avoidable fixed costs are relevant for making decisions such asoutsourcing and dropping a product or service.

02

Preparation of outsourcing analysis


Outsourcing Analysis
Outsourcing Analysis

Particulars

Make ($)

Buy ($)

Variable cost per unit:

Direct material

5

Direct labor

3

Variable overhead

6

Purchase price offered by outside supplier

15

Total

$14

$15

Decision:

The making cost of the product is less than the outsourcing price. The company, therefore, should continue making the product instead of outsourcingit.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

See all solutions

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free