Question - Climate-Control, Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Climate-Control for $32 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally:
|
Per Unit
|
15,000 Units
per year
|
|
Direct materials
|
$9
|
$135,000
|
|
Direct labor
|
11
|
165,000
|
|
Variable manufacturing overhead
|
3
|
45,000
|
|
Fixed manufacturing overhead, traceable
|
6*
|
90,000
|
|
Fixed manufacturing overhead, common, but allocated
|
13
|
195,000
|
|
Total cost
|
$42
|
$630,000
|
*40% supervisory salaries; 60% depreciation of special equipment (no resale value).
Required:
1a. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, compute the total cost of making and buying the parts.
1b. Should the outside supplier's offer be accepted?
Accept
Reject
2a. Suppose that if the thermostats were purchased, Climate-Control, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be $122,000 per year. Compute the total cost of making and buying the parts.
2b. Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $32 each?
Reject
Accept