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
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 Unit | 15,000 Units 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: |
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. |
Make | Buy | |
Total relevant cost (15,000 units) | $____________ | $____________ |
1b. | Should the outside supplier's offer be accepted? | ||||
|
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 $65,000 per year. Compute the total cost of making and buying the parts. |
Make | Buy | |
Total relevant cost (15,000 units) | $___________ | $___________ |
2b. | Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $20 each? | ||||
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started