Question - Pearson plumbing and heating manufactures thermostats that's it uses in several of its products. Management is considering whether to continue manufacturing the thermostat or to buy them from an outside source the following information is available.
1. The company needs 80,000 thermostats per year. Thermostat can be purchased from an outside supplier at cost of $6 per unit.
2. The cost of manufacturing thermostat is $7.50 per unit computed as follows.
Direct materials. $156,000
Direct labor. 132,000
Manufacturing overhead.
Variable. 168,000
Fixed. 144,000
Total manufacturing cost. $600,000
Cost per unit. $7.50
($600,000÷80,000units)
3. Discounting the manufacturer of the thermostats will eliminate all of the direct materials and direct labor cost but will eliminate only 60% of the variable overhead cost.
4. If the thermostats are purchased from an outside source search in certain machinery used in the production process would no longer have to be leased accordingly $9,200 a fixed overhead cost could be avoided no other reduction will result from discounting production of the thermostat
Instruction
A. Prepares a schedule to determine the incremental cost or benefit of buying thermostats from the outside supplier. On the basis of the schedule would you recommend that the company manufacture thermostats or buy them from the outside source?
B. Assume that if the thermostats are purchased from the outside source the factory space previously used to produce thermostats can be used to manufacture an additional 6000 heat flow regulators per year. These regulators have an estimated contribution margin of $18 per unit. The manufacturer of additional heat flow regulators what have no effect on fixed overheads. With this new assumption change your recommendation as to whether to make or buy a thermostat in support of your conclusion prepare a schedule showing the incremental cost or benefit of buying thermostats from the outside source and using the factory space to produce additional heat flow regulators.