Q1) Climate-Control, Inc., produces a variety of heating and air-conditioning units. Company is presently producing all of its own component parts. The outside supplier has offered to sell thermostat to Climate-Control for $20 per unit. To estimate this offer, Climate-Control Inc., has collected following information relating to its own cost of producing 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 social equipment (no real value).
Questions:
1. Suppose that company has no alternative use for facilities now being used to make thermostat, should outside suppliers' offer be accepted? Show all computations.
2.Assume that if thermostats were bought, Climate-Control, Inc., could use freed capacity to launch new product. Segment margin of new product would be $65,000 per year. Should Climate-Control, Inc., accept offer to purchase thermostats from outside supplier for $20 cash each? Illustrate calculations.