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 $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:

Per 15,000 Units Unit per Year Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6 $ 90,000 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 120,000 Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . 1 15,000 Fixed manufacturing overhead, traceable . . . . . . . . . . . . . 5* 75,000 Fixed manufacturing overhead, common, but allocated . . . . 10 150,000 Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30 $450,000 *40% supervisory salaries; 60% depreciation of special equipment (no resale value).

Required:
1. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, should the outside supplier’s offer be accepted? Show all computations.
2. 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. Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $20 each? Show computations.