Question

Blowing Sand Company also has the Blast fan model. It is the company’s top-selling model with sales of 30,000 units per year. This model has a dual fan as well as a thermostat component that causes the fan to cycle on and off depending on the room temperature. Blowing Sand has always manufactured the thermostat component but is considering buying the part from a supplier. It costs Blowing Sand $5 to make each thermostat ($2.50 variable and $2.50 fixed). Flurry Co. has offered to sell the component to Blowing Sand for $4. Blowing Sand’s decision to purchase the part from Flurry would eliminate all variable costs but none of the fixed costs. Blowing Sand has no other possible uses for the area currently dedicated to the thermostat production. Calculate the effect on Blowing Sand's annual total costs if the thermostat is purchased from Flurry Co.

Answer 1

Answer:

The effect of purchasing thermostat from Flurry Co. on Blowing Sand's annual total cost: it will rise by $45,000

Explanation:

Blowing Sand fixed cost allocated to thermostat manufacture : Fixed cost allocated to a unit x Manufactured Amount = $2.5 x 30,000 = $75,000

If Blowing Sand continues to manufacture thermostat component, the total cost relating to this activity will be: Unit cost x Manufactured Amount = $5 x 30,000 = $150,000

If Blowing Sand outsources the manufacture to Flurry Co., the total cost relating to this activities will include: Cost paid to Flurry Co. for the Manufacture of 30,000 thermostat + Fixed cost allocated to thermostat manufacture ( because Blowing Sand has no other possible uses for the area dedicated to thermostat production, thus fixed cost can not be saved). Thus the total cost for this option will be: 4 x 30,000 + 75,000 = $195,000

So, the if Blow sand continues to product thermostat component, the cost will be $45,000 lower comparing the outsourcing option, i.e: $150,000 in comparison to $195,000 respectively.