Cullumber Water Co. is a leading producer of greenhouse irrigation systems. Curr

ID: 2564369 • Letter: C

Question

Cullumber 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 40,650 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation Direct materials Direct labor Variable manufacturing overhead Direct fixed manufacturing overhead Allocated fixed manufacturing overhead $12 8 (30% salaries, 70% depreciation) Total unit cost $35 Clifton Clocks has offered to provide the timer units to Culumber at a price of $35 per unit. If Cullumber accepts the offer, the current timer unit supervisory and clerical staff will be laid off x Your answer is incorrect. Try again Calculate the total relevant cost to make or buy the timer units. (Round answers to 0 decimal places, e.g. 5,275.) Make Buy 35 Total relevant cost s x Your answer is incorrect. Try again Assuming that Cullumber 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? Yes x Your answer is incorrect. Try again Assume that if Cullumber 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 94,270 of the new lights each year at a price of $12. Vable 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 Clifton's offer Total relevant cost to make 32 Net relevant cost if they accept Clifton's offer $ xYour answer is incorrect. Try again Should Cullumber Water accept Clifton's offer? Accept Clifton's offer

Explanation / Answer

Answer

Fixed manufacturing overhead per unit

Units

40650

C=A x B

Total Overhead

325200

D=C x 30%

Salaries 30%

97560

($2.4 per unit)

E= C x 70%

Depreciation 70%

227640

($5.6 per unit)

---Relevant Cost to make will comprise of all variable cost plus avoidable fixed overhead that will be incurred if the production happens. Hence, Salary will be part of relevant cost.

Direct material

Direct Labor

variable manufacturing overhead

Avoidable fixed manufacturing overhead

2.4

Total RELEVANT COST to MAKE (per unit)

$ 24.4

---Relevant cost to Buy will comprise of Purchase cost. Also, since the Salaries expenses (avoidable overhead) will be avoided if the units are bought, the amount will be deducted to calculated the RELEVANT cost

Purchase cost

(-) Salaries

2.4

TOTAL RELEVANT Cost to BUY

$ 32.6

When the freed capacity is used to generate additional revenue (if the offer is accepted), such revenue is reduced from the purchase cost to get the ‘Net purchase Cost’.

---The relevant cost to make will be same—

Direct material

Direct Labor

variable manufacturing overhead

Avoidable fixed manufacturing overhead

2.4

Total RELEVANT COST to MAKE (per unit)

$ 24.4

---The Relevant cost to BUY will be—

Additional Sales [94270 x $12]

1131240

(-) variable cost [94270 x $9]

848430

Contribution Margin

282810

Contribution per unit of purchased units [282810 / 40650 units]

$ 7

Avoidable Salaries wont be deducted from Purchase cost as these will be incurred to produce light and generate additional revenues.

Relevant cost to Buy---

Purchase cost

(-) Additional revenue per unit

Net Purchase Cost/Total Relevant Cost per unit

$ 28