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Exercise 12-3 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

Exercise 12-3 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:

   
    Per Unit   15,000 Units
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   
 








*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. (Omit the "$" sign in your response.)

   
          Make         Buy
  Total relevant cost (15,000 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 $65,000 per year. Compute the total cost of making and buying the parts. (Omit the "$" sign in your response.)

   
          Make         Buy
  Total relevant cost (15,000 units) $   $  

   
2b.

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

   
 
Accept
Reject


quote
. . . . . . . anufacturing overhead, traceable 5* 75,000 Fixed manufacturing overhead, common, but allocated 10 150,000 Total cost $ 30 $ 450,000 *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. (Omit the "$" sign in your response.) Make Buy Total relevant cost (15,000 units) $ $ 1b. Should the outside supplier's offer be accepted? Rej. . . . .
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