(a1) Sandhill Water Co. is a leading producer of greenhouse irrigation systems.
ID: 2565848 • Letter: #
Question
(a1)
Sandhill 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 40,860 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation.Direct materials $11 Direct labor 6 Variable manufacturing overhead 4 Direct fixed manufacturing overhead 8 (30% salaries, 70% depreciation) Allocated fixed manufacturing overhead 5 Total unit cost $34
Clifton Clocks has offered to provide the timer units to Sandhill at a price of $36 per unit. If Sandhill accepts the offer, the current timer unit supervisory and clerical staff will be laid off.
Explanation / Answer
Sandhill Water Co
Determination of costs to MAKE 40,860 timers:
Determination of total relevant costs to MAKE 40,860 timers:
per unit
total
Direct material
$11
$449,460
Direct labor
$6
$245,160
Variable manufacturing overhead
$4
$163,440
Salaries of supervisory and clerical staff
$2.40
$98,064
Total cost
$23.40
$956,124
Determination of total relevant costs to BUY 40,860 timers:
Price offered by Clifton
$36
Total cost for 40,860 timers
$36 x 40,860
$1,470,960
Make
Buy
Total Relevant Cost
$956,124
$1,470,960
Notes:
Determination of total relevant costs to MAKE 40,860 timers:
per unit
total
Direct material
$11
$449,460
Direct labor
$6
$245,160
Variable manufacturing overhead
$4
$163,440
Salaries of supervisory and clerical staff
$2.40
$98,064
Total cost
$23.40
$956,124
Determination of total relevant costs to BUY 40,860 timers:
Price offered by Clifton
$36
Total cost for 40,860 timers
$36 x 40,860
$1,470,960
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