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.

Should Blowing Sand continue to make the thermostat or purchase the part from Flurry Co.?

• Purchase

• Continue to make

Answer 1

It is better to make as cost to purchase is higher than relevant cost to make
As fixed cost are unavoidable whether the part is made or purchased from oustide
hence relevant cost to make per unit is $2.5 and to purchase is $4, hence total cost
will increase by $45000
Calculation
	Make	Buy	Increases/(decreases)
Variable cost	75000		-75000
	(2.5*30000)
Purchase		120000	120000
		(30000*4)
Fixed cost (remains same)	75000	75000	0
Total cost	150000	195000	45000
It is better to make as the total cost will increase by $45000 if purchased from outside
If any doubt please comment
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