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 $25 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 $84,000 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 $25 each?

Per Unit 15,600   
Units per year   Direct materials $ 5        $ 78,000         Direct labor 7        109,200         Variable manufacturing overhead 4        62,400         Fixed manufacturing overhead, traceable 10*       156,000         Fixed manufacturing overhead, common, but allocated 9        140,400         Total cost $ 35        $ 546,000      

Explanation / Answer

1 Make Buy Direct materials 5   Direct labor 7 VMOH 4 FMOH 4 Purchase cost 25 Total relevant cost/unit 20 25 Total for 15600 units 312000 390000 The outside supplier's offer cannot be accepted Reject 2. Freed capacity to be used Total relevant cost/unit as above 20 Depreciation 6 Revised relevant cost for this alternative 26 Purchase cost 25 Total cost for 15600 units 405600 390000 Reduced by new product margin 84000 Net relevant costs 321600 390000 Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $25 each? Reject As it is costlier to making.

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