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Total Relevant Cost - Climate Control Exercise

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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 $31 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally (see attachment).

1. Assuming that the company has no alternative use for the facilities now being used to produce the thermostst, should the outside supplier's offer be accepted?

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 $116,800 per year. Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $31 each?

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Solution Summary

For your review, I have attached a formatted MS Excel spreadsheet which contains detailed instructions for the necessary calculations required in regards to the total relevant costs for the Climate Control, Inc. exercise and whether or not the company should make or purchase a fixed asset.