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Relevant cost of buying a component

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 = $_________________

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Solution Summary

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

$2.19