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Climb Climate Control Inc. manufactures a variety of heating and air-conditioning units....

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Accounting

Climb 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 a
thermostat to Climb Climate Control for $20 per unit. To evaluate this offer, Climb Climate Control has
gathered the following information relating to its own cost of producing the thermostat internally.
Per Unit 15,000 units per Year
Direct Materials $6.00 $90,000
Direct Labor $8.00 $120,000
Variable Overhead $1.00 $15,000
Fixed Overhead $15.00 $225,000
Total Cost $30.00 $450,000
Required:
1. Assuming the company has no alternative uses for its production capacity now being used to
produce thermostats, should the outside suppliers offer be accepted? Why?
2. Suppose that if the company purchases the thermostats from the outside supplier that the
freed-up production capacity could be used to launch a new product with estimated net of
$65,000. Should the offer be accepted? Why?
Hint We are only concerned with per unit cost and we only care about relevant costs

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