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 $42 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 nearest dollar amount.)

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 $156,000 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to nearest dollar amount.)

Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $42 each?

Per Unit 14,200   
Units per year   Direct materials $ 13        $ 184,600         Direct labor 15        213,000         Variable manufacturing overhead 2        28,400         Fixed manufacturing overhead, traceable 5*       71,000         Fixed manufacturing overhead, common, but allocated 17        241,400         Total cost $ 52        $ 738,400      

Explanation / Answer

Direct Materials 4 Direct Labor 6 Variable Manufacturing Overhead 1 Traceable fixed cost (30% * 3) 0.9 Total cost if produced 11.9 Less: Offered price 12 Benefit if produced 0.1 Multiply: Annual requirements 15800 Total Benefit if produced 1580 Decision: Produced internally

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