Posted: April 26th, 2016

would you recommend that the company manufacture thermostats or buy them from the outside source?

a. 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 with a minus sign. Omit the “$” sign in your response.)

Make the
Thermostats Buy the
Thermostats Incremental
Analysis
Manufacturing costs for 80,000 thermostats:
(Click to select)Notes payableRent payableDirect laborDirect materialsAccounts payable $ $
(Click to select)Notes payableSalesDirect laborDirect materialDepreciation expense
Manufacturing overhead:
(Click to select)CashDepreciation expenseVariableSalesAccounts receivable $
(Click to select)Depreciation expenseFixedSalesAccounts receivableCash
(Click to select)Rent payableInterest expenseCommon stockCost to salesCost to purchase

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Totals $ $ $

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b. 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.)

Effect of alternative use of factory space:
Incremental benefit (cost) of buying thermostats from outside source (see part a) $
Add: Contribution margin of alternative use of factory space

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Incremental benefit of buying thermostats from an outside source and using factory space to produce additional heat-flow regulators $