Henry Horticultural, Ltd., is a leading producer of greenhouse irrigation system

Question

Henry Horticultural, Ltd., 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 40,780 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation.

Talbert Time Pieces has offered to provide the timer units to Henry at a price of $32 per unit. If Henry accepts the offer, the current timer unit supervisory and clerical staff will be laid off.

Total relevant cost to make and buy the timer units: Make: 995,032 Buy: 1,304,960

Assuming that Henry Horticultural has no other use for either the facilities or the equipment currently used to manufacture the timer units, the company should not accept Talbert's offer.

Now assume that if Henry Horticultural accepts Talbert’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 93,050 of the new lights each year at a price of $12. Variable costs of the lights are expected to be $9 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 Talbert's offer.

Direct Materials 12 Direct Labor 7 Variable manufacturing overhead 3 Direct fixed manufacturing overhead 8(30% salaries, 70% depreciation) Allocated fixed manufacturing overhead 8 total unit cost 38

Explanation / Answer

Relevant cost Make Direct material 12 Direct labor 7 Variable manufacturing cost 3 Fixed manufacturing cost - salaries 2.4 24.40 Number of units made 40780 Total relevant cost 995032 Add : oppurtunity cost lost( ( 12-9) * 93050) 279150 Total relevant cost 1274182 Buy Purchase cost 32 Number of units made 40780 Total relevant cost 1304960 Less : oppurtunity cost lost( ( 12-9) * 93050) 279150 Net relevant cost 1025810

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