Fresh Cool Ltd. manufactures and sells an air-purifier fan model - Purer 1. Fresh Cool expects to sell 12,000 units of Purer I in the coming year. This model requires a thermostat component that allows the fan to automatically work upon a pre-set temperature. The company has had an internal production division manufacturing the thermostat component in-house. Currently, the management team is considering a proposal to outsource this component to an external supplier

- Mechanica Limited.

The outsourcing decision would eliminate all variable costs but some of the fixed costs. Allocated costs will have to be absorbed by other production departments.

Variable manufacturing costs to produce each thermostat component were:

Direct materials per unit: $8

Direct labour per unit:

$6.50

Indirect labour per unit: $0.80

Utilities per unit:

$0.50

Finish at

Fixed manufacturing costs to produce each thermostat component were:

	Cost item	Direct Allocated
		Depreciation $3,760 $1,250
	Property taxes 2,250	900
	Insurance	3,170 2,030

Mechanica Limited has offered Fresh Cool Ltd. a quote to purchase a similar thermostat component with the following information:

1. The lowest quotation for 12,000 units of thermostat component is $189,000
2. freight and inspection costs would be $0.70 per unit; receiving costs of $4,200 per year would be incurred by Fresh Cool.
3. If the thermostat components are purchased on an ongoing basis, one of Fresh Cool's manufacturing plants would be closed. The facilities would be rented out to produce a net income of $24,000 per year.
4. If the thermostat components are purchased on an ongoing basis, a machine operator from the plant will be transferred to the purchasing department (the employee's salary is $55,000).

Required:

a) Should Fresh Cool Ltd. continue to produce the thermostat in-house or purchase the component from Mechanica? Justify your answer with an appropriate incremental analysis.

What qualitative factors or strategic issues should the management team consider in making this make-or-buy decision?

Answer rating: 100% (QA)

To determine whether Fresh Cool Ltd should continue to produce the thermostat inhouse or purchase the component from Mechanica we need to perform an incremental analysis Incremental analysis focuses o... View the full answer