Question

Tanaka Systems manufactures power switches for battery backup systems. The power switch has the following manufacturing costs per unit: Direct materials $9.00 Direct labor 2.50 Variable overhead 11.00 Fixed overhead 14.00 Manufacturing product cost $36.50 Another company has offered to sell Tanaka the switch for $19.25 per unit. If Tanaka 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. Please determine if Tanaka should continue to make the switch or buy it from the outside manufacturer and why

Answer 1

Answer:

Tanaka Systems should buy the switch from outside supplier, because the Unitary Product Cost will be decreased.

Explanation:

The current manufacturing product cost of Tanaka’s switch are made by the sum of Direct Materials ($9,00) + Direct Labor ($2,50) + Variable overhead ($11,00) + Fixed overhead ($14,00), which totals $36,50.

If Tanaka Systems buy the switch from the outside supplier instead of producing it, the costs with Direct Materials, Direct Labor and Variable Overhead will not be necessary anymore because these costs vary according to the production level. In this case, the only cost to remain is Fixed Overhead as none of the fixed costs are avoidable. So, the new unitary product cost will be made by the sum of Switch Cost from supplier ($19,25) + Fixed Overhead ($14,00), which totals $33,50.