Shurp Company manufactures a variety of air-conditioning units. The company is currently

manufacturing all of its component parts. An outside supplier has offered to sell a thermostat to Shurp

for P40 per unit. To evaluate this offer, Shurp has gathered the following information relating to its own

cost of producing the thermostat internally:

15,000 units per year

DM P12 P180,000

DL 16 240,000

VMOH 2 30,000

FMOH, traceable *10 150,000

FMOH, common 20 300,000

Total cost P60 P900,000

40% supervisory salaries; 60% depreciation of special equipment (no resale value)

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?

2. Suppose that if the thermostat were purchased, Shurp could use the freed capacity to launch a new

product. The segment margin of the new product would be P130,000 per year. Should Shurp accept the

offer to buy the thermostats from the outside supplier for P40 each?