Question
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
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?
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