Red-A 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: The company needs 80,000 thermostats per year. Thermostats can be purchased from an outside supplier at a cost of $6 per unit. The cost of manufacturing thermostats is $7.50 per unit, computed as follows: $ 156,000 132,000 Direct materials Direct labour Manufacturing overhead: Variable Fixed Total manufacturing costs Cost per unit ($600,000 / 80,000 units) 168,000 144,000 600,000 7.50 Discontinuing the manufacture of the thermostats will eliminate all of the direct materials and direct labour costs but will eliminate only 60 percent of the variable overhead costs. 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. Required: a) Prepare a Differential Cost Statement to determine whether to buy (12 marks) thermostats from the outside supplier. 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-flow regulators per year. These regulators have an estimated contribution of $18 per unit. The manufacture of the additional heat-flow regulators would have no effect on fixed overhead. (5 marks) b) 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. c) Would the above assumption change your recommendation in part (a)? (2 marks) (Total 19 marks)