Sheridan Water Co. is a leading producer of greenhouse irrigation systems. Curre

Question

Sheridan 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 40,770 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 Sheridan at a price of $33 per unit. If Sheridan accepts the offer, the current timer unit supervisory and clerical staff will be laid off.

Assume that if Sheridan 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 91,590 of the new lights each year at a price of $11. Variable costs of the lights are expected to be $8 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.

Direct materials $12 Direct labor 6 Variable manufacturing overhead 4 Direct fixed manufacturing overhead 9 (30% salaries, 70% depreciation) Allocated fixed manufacturing overhead 6   Total unit cost $37

Explanation / Answer

(274,770)

{91590×($11-$8)}

Make Buy Direct material $12 Direct labour $6 Variable overhead $4 Relevant cost per unit to make $22 Cost to Buy $33 Units needed 40,770 40,770 Total cost $896,940 $1,345,410 Contribution margin from alternative use of facilities

(274,770)

{91590×($11-$8)}

Net cost $1,070,640 Do not accept the order as cost to make is less than cost to Buy.

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