Climate-Control, Inc., manufactures a variety of heating and air-conditioning un
ID: 2582565 • Letter: C
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 $30 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally: 14,200 Per Unit Units per year Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, common, but allocated $127,800 156,200 28,400 71,000 184,600 5* 13 Total cost S 40 $568,000 "40% supervisory salaries: 60% depreciation of special equipment (no resale value). Required 1a. 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.) Make Total relevant cost (14,200 units) $ 1b. Should the outside supplier's offer be accepted? Accept OReject 2a. 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 $101,200 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to nearest dollar amount.) Make Buy Total relevant cost (14,200 units) $Explanation / Answer
1
Per unit Differential units
14200 units
Make
Buy
Make
Buy
Cost of Purchasing
$30
426000
Direct Materials
9
127800
Direct Labor
11
156200
Variable Manufacturing Overhead
2
28400
Fixed Manufacturing overhead, Traceable
2
28400
Fixed Manufacturing overhead, common
Total Relevant costs
24
30
340800
426000
The company should reject the offer and should continue to produce parts internally
2
Make
BUY
Cost of Purchasing
426000
Cost of Making
340800
Oppurtunity cost
101200
442000
426000
Difference in favor buying the equipment from outside supplier
16000
1
Per unit Differential units
14200 units
Make
Buy
Make
Buy
Cost of Purchasing
$30
426000
Direct Materials
9
127800
Direct Labor
11
156200
Variable Manufacturing Overhead
2
28400
Fixed Manufacturing overhead, Traceable
2
28400
Fixed Manufacturing overhead, common
Total Relevant costs
24
30
340800
426000
The company should reject the offer and should continue to produce parts internally
2
Make
BUY
Cost of Purchasing
426000
Cost of Making
340800
Oppurtunity cost
101200
442000
426000
Difference in favor buying the equipment from outside supplier
16000
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