Question

EXERCISE 12-3 Make or Buy a Component [LO3] 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

Answer 1

(1) Differential analysis

	Make	Buy
Direct Material	$90,000
Direct Labor	$120,000
Variable Manufacturing Overhead	$15,000
Fixed Manufacturing Overhead (75,000 * 40%)	$30,000
Purchase Cost (15,000 * 20)		$300,000
Total Relevant Cost	$255,000	$300,000

Financial Disadvantage = $300,000 - $255,000

                                          = $45,000

So, Climate-Control, Inc., should not accept the offer to buy the thermostats from outside supplier for $20 each

(2) Differential analysis

	Make	Buy
Direct Material	$90,000
Direct Labor	$120,000
Variable Manufacturing Overhead	$15,000
Fixed Manufacturing Overhead (75,000 * 40%)	$30,000
Opportunity Cost	$65,000
Purchase Cost (15,000 * 20)		$300,000
Total Relevant Cost	$320,000	$300,000

Financial Advantage = $320,000 - $300,000

                                          = $20,000

So, Climate-Control, Inc., should accept the offer to buy the thermostats from outside supplier for $20 each.