PROBLEM 21.3A Make or Buy Decision LO21-1, LO21-2, LO21-3, LO21-4 Parsons Plumbing & Heating manufactures thermostats that it uses in several of its products. Management is considering whether to continue manufacturing the thermostats or to buy them from an outside source. The following information is available. 1. The company needs 80,000 thermostats per year. Thermostats can be purchased from an outside supplier at a cost of $6 per unit. 2. The cost of manufacturing thermostats is $7.50 per unit, computed as follows. Direct materials Direct labor Manufacturing overhead: Variable Fixed Total manufacturing costs $156,000 132,000 168,000 144,000 $600,000 $ 7.50 3. Discontinuing the manufacture of the thermostats will eliminate all of the direct materials and direct labor costs but will eliminate only 60 percent of the variable overhead costs. Cost per unit ($600,000 80,000 units) 4. If the thermostats are purchased from an outside source, certain machinery used in the production process would no longer have to be leased. Accordingly, $9,200 of fixed overhead costs could be avoided. No other reductions will result from discontinuing production of the thermostats.