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 $44 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 $160,000 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 $44 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 $44 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

Total relevant cost excluding fixed costs per unit = 13+15+4+ (5*0.4) = $34/unit

Outside supplier cost = $44/unit

Since fixed cost will be the same even if the manufacturing is outsourced

1a) Thus total relevant costs(15,400 units)

Make = $523600

Buy = $677600

1b) No the outside supplier offer should be rejected as buying costs are higher.

2a) Since the freed up capacity is used and new product margin is $160,000

Relevant costs

Make: $523600

Buy = 677600 – 160000 = $517600

2b) Thus we should accept to buy since cost of buying is cheaper than making product in-house

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