Fiber Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:
Direct Material $ 9.00
Direct Labor 1.50
Variable Overhead 5.00
Fixed Overhead 9.00
Manufacturing Product Cost $ 24.50
Another company has offered to sell Fiber Systems the switch for $18.50 per unit.
If Fiber Systems buys the switch from the outside supplier, the manufacturing facilities that will be idled cannot be used for any other purpose, yet none of the fixed costs are avoidable.
Prepare an outsourcing analysis to determine whether Fiber Systems should make or buy the switch.