Question: 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 $14 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
|
15,900 Units
per year
|
|
Direct materials
|
$4
|
$63,600
|
|
Direct labor
|
6
|
95,400
|
|
Variable manufacturing overhead
|
3
|
47,700
|
|
Fixed manufacturing overhead, traceable
|
3*
|
47,700
|
|
Fixed manufacturing overhead, common, but allocated
|
8
|
127,200
|
|
Total cost
|
$24
|
$381,600
|
*20% supervisory salaries; 80% depreciation of special equipment (no resale value).
Requirement 1:
(a) What will be the total relevant cost of 15,900 units, if they are manufactured internally?
Requirement 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 $61,000 per year.
(a) What will be the total relevant cost of 15,900 units, if they are manufactured internally?