Exercise 10-3 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 $30 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		14,400 Units per year
Direct materials	$	9	$	129,600
Direct labor		11		158,400
Variable manufacturing overhead		2		28,800
Fixed manufacturing overhead, traceable		5*		72,000
Fixed manufacturing overhead, common, but allocated		13		187,200
Total cost	$	40	$	576,000

*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. (Round your Fixed manufacturing overhead per unit rate to nearest dollar amount.)

	Make	Buy
Total relevant cost (14,400 units)	$	$

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 $95,400 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to nearest dollar amount.)

	Make	Buy
Total relevant cost (14,400 units)	$	$

2b.

Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $30 each?

	Accept
	Reject