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 $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?

Per Unit 15,900 Units
per year    Direct materials $ 9    $ 143,100     Direct labor 11    174,900     Variable manufacturing overhead 3    47,700     Fixed manufacturing overhead, traceable 9*   143,100     Fixed manufacturing overhead, common, but allocated 13    206,700     Total cost $ 45    $ 715,500  

Explanation / Answer

Relevant Cost - Make:

Direct Material = 143100

Direct Labor = 174900

Variable Manufacturing Overhead = 47700

Relevant Fixed Manufacturing Overhead = 6*.40*15900 = 38160 (Only supervisor salary is considered as relevant)

Total Relevant Cost = 143100 + 174900 + 47700 + 38160 =403860

Relevant Cost - Buy =15900x35 = 556500

Part B:

Total Relevant Cost (Make) = 143100 + 174900 + 47700 + 38160 =403860 + 150,560 = 554420

Total Relevant Cost (Buy) = 556500

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