Relevant Costs for Non-Routine Decision Making 305 Exercise 3 (Make or Buy a Component) Cañada 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 Cañada for P200 per unit. To evaluate this offer, Cañada, Inc., has gathered the following information relating to its own cost of producing the thermostat internally: Per 15,000 Units per Year P 900,000 1,200,000 150,000 750,000 Unit Direct materials.. Direct labor .... P60 80 10 Variable manufacturing overhead . Fixed manufacturing overhead, traceable.. Fixed manufacturing overhead, common, but allocated.. Total cost..... 50* 100 P300 1,500,000 P4,500,000 * 40% supervisory salaries; 60% depreciation of special equipment (no resale value). Required: 1. 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. 2. Suppose that if the thermostats were purchased, Cañada, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be P650,000 per year. Should Cañada, Inc., accept the offer to buy the thermostats from the outside supplier for P200 each? Show computations.
Relevant Costs for Non-Routine Decision Making 305 Exercise 3 (Make or Buy a Component) Cañada 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 Cañada for P200 per unit. To evaluate this offer, Cañada, Inc., has gathered the following information relating to its own cost of producing the thermostat internally: Per 15,000 Units per Year P 900,000 1,200,000 150,000 750,000 Unit Direct materials.. Direct labor .... P60 80 10 Variable manufacturing overhead . Fixed manufacturing overhead, traceable.. Fixed manufacturing overhead, common, but allocated.. Total cost..... 50* 100 P300 1,500,000 P4,500,000 * 40% supervisory salaries; 60% depreciation of special equipment (no resale value). Required: 1. 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. 2. Suppose that if the thermostats were purchased, Cañada, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be P650,000 per year. Should Cañada, Inc., accept the offer to buy the thermostats from the outside supplier for P200 each? Show computations.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Relevant Costs for Non-Routine Decision Making 305
Exercise 3 (Make or Buy a Component)
Cañada 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 Cañada for P200 per unit.
To evaluate this offer, Cañada, Inc., has gathered the following information
relating to its own cost of producing the thermostat internally:
15,000 Units
per Year
P 900,000
1,200,000
150,000
750,000
Per
Unit
P60
Direct materials
Direct labor
Variable manufacturing overhead.
Fixed manufacturing overhead, traceable.
Fixed manufacturing overhead, common, but
allocated.
Total cost....
80
10
50*
1,500,000
P4,500,000
100
P300
* 40% supervisory salaries; 60% depreciation of special equipment (no resale
value).
Required:
1. 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.
2. Suppose that if the thermostats were purchased, Cañada, Inc., could use
the freed capacity to launch a new product. The segment marġin of the
new product would be P650,000 per year. Should Cañada, Inc., accept
the offer to buy the thermostats from the outside supplier for P200 each?
Show computations.
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