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(a1) SHOW SOLUTION LINK TO TEXT (a2) SHOW SOLUTION LINK TO TEXT (b1) Henry Horti

ID: 458188 • Letter: #

Question

(a1)

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(a2)

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(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 $35
Talbert 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) Total cost to make or buy = $35 * 40,650 = $1, 422,750

A2) Yes. It can go ahead with the offer, as costs are same for the in house manufacturing.

It can sell the existing equipment and machineries, which will save them from the depreciation loss, year after year, and the maintenance cost for each

A3)

Sell = 94,270 * 12 = $1,131,240

Cost (new line) = 94,270 * 9 = $848,430

Total cost = 848,430 + 1, 422,750 = $2,271,180