Exercise 10-3 Make or Buy a Component [LO3] Climate-Control, Inc., manufactures
ID: 2381104 • Letter: E
Question
Exercise 10-3 Make or Buy a Component [LO3]
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 $36 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 $147,100 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to nearest dollar amount.)
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 $36 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? 14,900 Per Units Per Cost savings by not producing component internally Unit Year Direct materials $6 $89,400 Direct labor 8 119,200 Variable manufacturing overhead 1 14,900 Fixed manufacturing overhead, traceable and avoidable 4 59,600 Fixed mfg. overhead, common, and allocated 0 0 Total cost $19 $283,100 Cost of purchasing component from outside supplier (20) (298,000) Disadvantage of buying component from outside supplier ($1) ($14,900) Disadvantage of buying component from outside supplier ($14,900)
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