Problem 8-24 (Part Level Submission) Henry Horticultural, Ltd., is a leading pro

Question

Problem 8-24 (Part Level Submission) 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 40,910 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation. $11 Direct materials Direct labor Variable manufacturing overhead Direct fixed manufacturing overhead Allocated fixed manufacturing overhead 4 9 (30% salaries, 70% depreciation) 7 Total unit cost $38 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. (a1) Calculate the total relevant cost to make or buy the timer units. (Round answers to O decimal places, e.g. 5,275.) Make Buy Total relevant cost

Explanation / Answer

Note : Only those fixed costs which are specific to any option [ make or buy] are relevant fixed costs . In the given question , 30 % direct fixed manufacturing o/h ie salaries costs are relevant to 'make option' as these costs can be avoided in 'buy option' . Other fixed costs given are not relevant for decision making as those are unavaidable irrespective of whatever option is selected.

Calaculation of total relevant cost to make or buy the timer units

Particular Make ($) Buy ($) Direct materials per unit 11 Direct labour per unit 7 Variable manufacturing o/h per unit 4 Direct fixed  manufacturing o/h [ ie salaries : 30 % * $9 ] 2.70 Buying cost per unit 35 Relevant costs per unit 24.70 35 * timber units 40,910 40,910 Total relevant cost $1,010,477 $1,431,850

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