Climate-Control, Inc., manufactures a variety of heating and air-conditioning un
ID: 2376584 • Letter: C
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 $35 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally:
Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to two decimals and your final answers to the nearest dollar amount.Omit the "$" 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 $150,560 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to two decimals and your final answers to the nearest dollar amount. Omit the "$" sign in your response.)
Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $35 each?
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 $35 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
Assuming that the company has no alternative use for the facilities now being used to
produce the thermostst, should the outside supplier's offer be accepted?
15,900
Per
Units Per
Cost savings by not producing component internally
Unit
Year
Direct materials
$6
$95,400
Direct labor
8
127,200
Variable manufacturing overhead
1
15,900
Fixed manufacturing overhead, traceable and avoidable
4
57,240
Fixed mfg. overhead, common, and allocated
0
0
Total cost
$19
$295,740
Cost of purchasing component from outside supplier
(20)
(318,000)
Disadvantage of buying component from outside supplier
($1)
($22,260)
Disadvantage of buying component from outside supplier
($22,260)
Alternate Solution:
Total costs if units are produced internally
$715,500
Total costs if units are purchased from external supplier:
Cost paid to external supplier
$318,000
Unavoidable fixed costs
Traceable but unavoidable
85,860
Allocated and unavoidable
206,700
610,560
Disadvantage of buying component from outside supplier
$104,940
Assuming that the company has no alternative use for the facilities now being used to
produce the thermostst, should the outside supplier's offer be accepted?
15,900
Per
Units Per
Cost savings by not producing component internally
Unit
Year
Direct materials
$6
$95,400
Direct labor
8
127,200
Variable manufacturing overhead
1
15,900
Fixed manufacturing overhead, traceable and avoidable
4
57,240
Fixed mfg. overhead, common, and allocated
0
0
Total cost
$19
$295,740
Cost of purchasing component from outside supplier
(20)
(318,000)
Disadvantage of buying component from outside supplier
($1)
($22,260)
Disadvantage of buying component from outside supplier
($22,260)
Alternate Solution:
Total costs if units are produced internally
$715,500
Total costs if units are purchased from external supplier:
Cost paid to external supplier
$318,000
Unavoidable fixed costs
Traceable but unavoidable
85,860
Allocated and unavoidable
206,700
610,560
Disadvantage of buying component from outside supplier
$104,940
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