Problem
The McGee Company makes a complicated batting machine. Currently they produce their own ignition switches. Production manager Jimmy Edmonds has suggested they buy the switches rather than producing them in-house. CFO Jackie Buck is told by Jimmy that they can buy the switches for $8 per switch from the Cub Company. Further, Jimmy tells her that this is a great deal because it costs them $9 a switch to make them in-house and provides Ms. Buck with the information below.
Direct Materials $50,000
Direct Labor $75,000
Variable Manufacturing Costs $40,000
Fixed Manufacturing Costs (Allocated) $60,000
$225,000
Switches Manufactured Annually 25,000
Cost Per Switch ($225,000/25,000) $9.00 per switch
Ms. Buck comes to you, the financial analyst, and ask for your analysis of the information. What is your recommendation assuming all variable manufacturing costs will be eliminated and fixed manufacturing costs for the company are fixed? In your analysis, refer to one of the decision making models presented in the material and analyze the decision - step by step.
Write your answer in a Microsoft Word or Excel document and submit.