2. Blossom Water Co. is a leading producer of greenhouse irrigation systems. Cur

Question

2. Blossom Water Co. is a leading producer of greenhouse irrigation systems. Currently, the company manufactures the timer unit used in each of its systems. Based on an annual production of 40,390 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation.

Clifton Clocks has offered to provide the timer units to Blossom at a price of $34 per unit. If Blossom accepts the offer, the current timer unit supervisory and clerical staff will be laid off.

Calculate the total relevant cost to make or buy the timer units. (Round answers to 0 decimal places, e.g. 5,275.)

Total relevant cost to buy ?

Assuming that Blossom Water has no other use for either the facilities or the equipment currently used to manufacture the timer units, should the company accept Clifton’s offer?

Assume that if Blossom Water accepts Clifton’s offer, the company can use the freed-up manufacturing facilities to manufacture a new line of growing lights. The company estimates it can sell 98,830 of the new lights each year at a price of $10. Variable costs of the lights are expected to be $7 per unit. The timer unit supervisory and clerical staff would be transferred to this new product line. Calculate the total relevant cost to make the timer units and the net cost if they accept Clifton's offer. Relevant cost $ ?

Net relevant cost if they accept offer $ ?

Should Blossom Water accept Clifton’s offer?

Direct materials $12 Direct labor 7 Variable manufacturing overhead 4 Direct fixed manufacturing overhead 10 (30% salaries, 70% depreciation) Allocated fixed manufacturing overhead 9   Total unit cost $42

Explanation / Answer

Question 1). a). Solution :- Calculation of total relevant cost to make timer units :-

Relevant cost of making one unit of timer = Direct material + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead (Salary portion)

= 12 + 7 + 4 + (10 * 30 %)

= 12 + 7 + 4 + 3

= $ 26

Total relevant cost of making 40390 timer units = 40390 * 26 = $ 1050140.

Question 1). b). Solution :- Calculation of total relevant cost to buy timer units :-

Relevant cost of buying one unit of timer = $ 34

Total relevant cost of buying timer units = 40390 * 34 = $ 1373260.

Conclusion :-

The company should not accept the offer of Clifton for buying the timer unit. Instead, The company should make timer unit on it own because the total relevant cost to make timer units are less than the total relevant cost to buy the timer units.

Question 1). a). Total relevant cost to make timer units $ 1050140. Question 1). b). Total relevant cost to buy timer units $ 1373260.

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