Problem - Climate-Control, Inc. manufacturers 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 $25 per unit. To evaluate this offer, Climate-Control, Inc. has gathered the following information relating to its own cost of production for the thermostat internally.

10,000 Units

                                                                                      Per Unit                      Per Year

Direct Materials                                                                $7                                $70,000

Direct Labor                                                                     8                                  80,000

Variable manufacturing overhead                                       2                                  20,000

Fixed manufacturing overhead, traceable                            5*                                50,000

Fixed manufacturing overhead, common, but allocated         10                                 100,000

*40% supervisor salaries and 50% depreciation of special equipment (no resale value).

A. 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? Show all computations.

B. 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 $70,000 per year. Should Climate-Control, Inc. accept the offer to buy the thermostats from the outside supplier for $25 each? Show computations.