Climate-Control, Inc., manufactures a variety of heating and air-conditioning un

Question

Climate-Control, Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Climate-Control for $31 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally:

Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to two decimals and your final answers to the nearest dollar amount.Omit the "$" sign in your response.)

Suppose that if the thermostats were purchased, Climate-Control, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be $116,360 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to two decimals and your final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Climate-Control, Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Climate-Control for $31 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally:

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Relevant Cost - Make:

Direct Material = 131400

Direct Labor = 160600

Variable Manufacturing Overhead = 29200

Relevant Fixed Manufacturing Overhead = 6*.40*14600 = 35040 (Only supervisor salary is considered as relevant)

Total Relevant Cost = 131400 + 160600 + 29200 + 35040 = 356240

Relevant Cost - Buy =14600*31 = 452600

Part B:

Total Relevant Cost (Make) = 131400 + 160600 + 29200 + 35040 = 356240 + 116360 = 472600

Total Relevant Cost (Buy) = 452600

Thanks.

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