Parsons Plumbing & Heating manufactures thermostats that it uses in several of i
ID: 2351495 • 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:
Discontinuing the manufacture of the thermostats will eliminate all of the direct materials and direct labor costs but will eliminate only 60 percent of the variable overhead costs.
If the thermostats are purchased from an outside source, certain machinery used in the production process would no longer have to be leased. Accordingly, $9,200 of fixed overhead costs could be avoided. No other reductions will result from discontinuing production of the thermostats.
Prepare a schedule to determine the incremental cost or benefit of buying thermostats from the outside supplier. On the basis of this schedule, would you recommend that the company manufacture thermostats or buy them from the outside source?(Amounts to be deducted should be indicated witha minus sign.Omit the "$" sign in your response.)
Assume that if thermostats are purchased from the outside source, the factory space previously used to produce thermostats can be used to manufacture an additional 6,000 heat-flow regulators per year. These regulators have an estimated contribution margin of $18 per unit. The manufacture of the additional heat-flow regulators would have no effect on fixed overhead. Would this new assumption change your recommendation as to whether to make or buy thermostats? In support of your conclusion, prepare a schedule showing the incremental cost or benefit of buying thermostats from the outside source and using the factory space to produce additional heat-flow regulators.(Leave no cells blank - be certain to enter "0" wherever required. Amounts to be deducted should be indicated with a minus sign. Omit the "$" sign in your response.)
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