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 has gathered the following information relating to its own cost of producing the thermostat internally:
Per Units Per
Direct materials $6 $90,000
Direct labor 8 120,000
Variable manufacturing overhead 1 15,000
Fixed manufacturing overhead, traceable *** 5 75,000
Fixed mfg. overhead, common, and allocated 10 150,000
Total cost $30 $450,000 300000 $150,000
*** 40% supervisory salaries; 60% depreciation of special equipment (no resale value).
1. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, should the outside supplier's offer be accepted?
2. Suppose that if the thermostats were purchased, Climate Control could use the freed capacity to launch a new product. The segment margin of the new product would be $65,000 per year. Should Climate Control accept the offer to buy the thermostats from the outside supplier for $20 each?
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