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 $20 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. (Enter "0" wherever required.)

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 $65,000 per year. Compute the total cost of making and buying the parts.

Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $20 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 $20 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

(1a) Total cost of making   = ($6 + $8 +$1 + $5) = $20

While cost of buying this product is $20 per unit.

(1b) outside supplier's offer should not be accepted after having equal cost in both case because company has no alternative use for the facilities now being used to produce the thermostat. If company buy this from supplier then this facilities will remain idle that will be an addition to cost.

(2a)

Total cost of making   = ($6 + $8 +$1 + $5) = $20

While cost of buying this product is ($20 per unit – 65000 / 15000) = $20 – $4.33 = $15.67

(2b) In this case climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $20 each .

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