Reference no: EM131101800

EXERCISE 12-3 Make or Buy a Component [LO3]

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:

	Unit	per Year
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$ 6	$ 90,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8	120,000
Variable manufacturing overhead . . . . . . . . . . . . . . . . . . .	1	15,000
Fixed manufacturing overhead, traceable . . . . . . . . . . . . .	5*	75,000
Fixed manufacturing overhead, common, but allocated . . . .	10	150,000
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$30	$450,000

Required:

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? Show all computations.

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. Should Climate-Control, Inc., accept the offer to buy the thermostats from the out- side supplier for $20 each? Show computations.