Parsons Plumbing & Heating manufactures thermostats that it uses in several of i
ID: 2351493 • Letter: P
Question
Parsons Plumbing & Heating manufactures thermostats that it uses in several of its products. Management is considering whether to continue manufacturing the thermostats or to buy them from an outside source. The following information is available:
The company needs 80,000 thermostats per year. Thermostats can be purchased from an outside supplier at a cost of $6 per unit.
The cost of manufacturing thermostats is $7.50 per unit, computed as follows:
Parsons Plumbing & Heating manufactures thermostats that it uses in several of its products. Management is considering whether to continue manufacturing the thermostats or to buy them from an outside source. The following information is available:
Explanation / Answer
make
buy
incremental
manufacturing costs
Direct materials
156000
0
-156000
direct labor
132000
0
-132000
manufacturing oh
variable
168000
67200
-100800
fixed
144000
134800
-9200
cost to purchase
0
480000
480000
totals
600000
682000
82000
Effect of alternative use of factory space
Incremental benefit (cost of buying…
-82000
Add: CM of alternative…
108000
increment benefit…
26000
some figures:
variable MOH under buy = 168,000*.4 (since 60% is avoidable)
fixed moh under buy = 144,000 - 9200
CM of alternative... = 6000*80
make
buy
incremental
manufacturing costs
Direct materials
156000
0
-156000
direct labor
132000
0
-132000
manufacturing oh
variable
168000
67200
-100800
fixed
144000
134800
-9200
cost to purchase
0
480000
480000
totals
600000
682000
82000