(a1) SHOW SOLUTION LINK TO TEXT (a2) SHOW SOLUTION LINK TO TEXT (b1) Henry Horti
ID: 2492528 • Letter: #
Question
(a1)
SHOW SOLUTION
LINK TO TEXT
(a2)
SHOW SOLUTION
LINK TO TEXT
(b1)
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 40,650 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation. Direct materials $12 Direct labor 7 Variable manufacturing overhead 3 Direct fixed manufacturing overhead 8 (30% salaries, 70% depreciation) Allocated fixed manufacturing overhead 5 Total unit cost $35Talbert Time Pieces has offered to provide the timer units to Henry at a price of $35 per unit. If Henry accepts the offer, the current timer unit supervisory and clerical staff will be laid off.
Explanation / Answer
(a1)
Make
Buy
Direct materials
$12.00
Direct labor
$7.00
Variable overhead
$3.00
Salaries ($8 × 30%)
$2.40
Relevant cost per unit to make
$24.40
Cost to buy
$35.00
Units needed
40,650
40,650
Total relevant cost
$991,860
$1,422,750
(a2)
No, the company should not accept the offer because the cost to make the product is less than the price as per the offer.
(b1)
Contribution margin per unit of new lights = Selling price – Variable cost = $12 - $9 = $3 per unit
Total Contribution margin of new lights lost because of making timer units = $3 * 94,270 = $282,810
The salaries cost shall be incurred for lights even if the timer unit is not manufactured. Hence, Salaries cost is now irrelevant.
Make
Buy
Direct materials
$12.00
Direct labor
$7.00
Variable overhead
$3.00
Relevant cost per unit to make
$22.00
Cost to buy
$35.00
Units needed
40,650
40,650
Total cost
$894,300
$1,422,750
Contribution margin of new lights
$282,810
Total relevant cost
$1,177,110
$1,422,750
Net relevant cost = $1,422,750 - $1,177,110 = $245,640
Make
Buy
Direct materials
$12.00
Direct labor
$7.00
Variable overhead
$3.00
Salaries ($8 × 30%)
$2.40
Relevant cost per unit to make
$24.40
Cost to buy
$35.00
Units needed
40,650
40,650
Total relevant cost
$991,860
$1,422,750
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