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$156,000Direct labor132,000Manufacturing overhead:Variable168,000Fixed144,000Total manufacturing costs$600,000Cost per unit ($600,000 80,000 units)$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.
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.
2133/3333 points awarded Scored This window shows your responses and what was marked correct and incorrect from your previous attempt. Problem 21.3A Make or Buy Decision (L021-1, LO21-2, L021-3, L021-4) 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 $ 156 , 000 Direct labor 132,000 Manufacturing overhead: Variable 168,000 Fixed 14 4 , 00 0 Total manufacturing costs S 600,000 Cost per unit ($600,000 + 80,000 units) S 7.50 3. Discontinuing the manufacture of the thermostats will eliminate all ofthe direct materials and direct labor costs but will eliminate only 60 percent of the variable overhead costs. 4. lfthe 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 xed overhead costs could be avoided. No other reductions will result from discontinuing production of the thermostats. Required: a-1. Prepare a schedule to determine the incremental cost or benefit of buying thermostats from the outside supplier. a-2. On the basis of this schedule, would you recommend that the company manufacture thermostats or buy them from the outside source? Assume that if thermostats are purchased from the outside source, the factory space previously used to produce thermostats can be used to manufacture an additional 6,000 heat-ow regulators per year. These regulators have an estimated contribution margin of $18 per unit. The manufacture of the additional heat-flow regulators would have no effect on xed overhead. b-1. Prepare a schedule showing the incremental cost or benet of buying thermostats from the outside source and using the factory space to produce additional heat-ow regulators. b-2. Would this new assumption change your recommendation as to whether to make or buy thermostats? 21.33/33.33 points awarded Scored Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B1 Req B2 Prepare a schedule to determine the incremental cost or benefit of buying thermostats from the outside supplier. Make the Buy the Incremental Thermostats Thermostats Analysis Manufacturing costs for 80,000 thermostats: Direct materials 156,000 0 156,000 Direct labor 132,000 0 132,000 Variable factory overhead 126,000 126,000 60,480 Manufacturing overhead: Fixed factory overhead V 144,000 134,800 O X X X X X Cost to purchase 0 480,000 (480,000) Totals $ 600,000 ~ $ 715,600 x $ 3,280 X *Red text indicates no response was expected in a cell or a formula-based calculation is incorrect; no points deducted.Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B1 Req B2 Prepare a schedule showing the incremental cost or benefit of buying thermostats from the outside source and using the factory space to produce additional heat-flow regulators. Effect of Alternative Use of Factory Space: Incremental benefit (cost) of buying thermostats from an outside source $ 3,280 X Add: Contribution margin of alternative use of factory space 108,000 Incremental (cost) benefit of buying thermostats from an outside source and using factory space to to produce additional heat flow regulators $ 126,000 X
