Exercise: Make or Buy a Component
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 $20 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally:
*40% supervisory salaries; 60% depreciation of special equipment (no resale value).
Requirement 1:
(a) What will be the total relevant cost of 15,000 units, if they are manufactured internally? (Omit the "$" sign in your response.)
(b) Should the outside supplier's offer be accepted?
Requirement 2:
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 $65,000 per year.
(a) What will be the total relevant cost of 15,000 units, if they are manufactured internally? (Omit the "$" sign in your response.)
(b) Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $20 each?