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    Relevant cost of buying a component

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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 $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?

    Total relevant cost = $______________

    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?

    Total relevant cost = $_________________

    © BrainMass Inc. brainmass.com June 3, 2020, 10:33 pm ad1c9bdddf
    https://brainmass.com/economics/labour-economics/relevant-cost-buying-component-236861

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    Solution Summary

    The solution explains how to calculate the relevant cost of making or buying a component.

    $2.19

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