Problem 8-24 (Part Level Submission) Oriole Water Co. is a leading producer of g
ID: 2558733 • Letter: P
Question
Problem 8-24 (Part Level Submission) Oriole 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 40,000 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 $13 Direct fixed manufacturing overhead 10 (30% salaries, 70% depreciation) Allocated fixed manufacturing overhead6 Total unit cost $38 Clifton Clocks has offered to provide the timer units to Oriole at a price of $34 per unit. If Oriole accepts the offer, the current timer unit supervisory and clerical staff will be laid off.Explanation / Answer
Unit cost Cost of 40000 units Direct materials $13 $520,000 Direct labor $5 $200,000 Variable manufacturing overhead $4 $160,000 Fixed manufacturing OH-Salaries $3 $120,000 Fixed manufacturing OH-Depreciation $7 $280,000 Allocated fixed manufacturing overhead $6 $240,000 Total Fixed manufacturing OH-Salaries $120,000 TotalFixed manufacturing OH-Depreciation $280,000 TotalAllocated fixed manufacturing overhead $240,000 Depreciation cost and allocated overhead are not relevant costs These will be incurred , even if it is decided to accept the offer Relevant costs to make Direct materials $520,000 Direct labor $200,000 Variable manufacturing overhead $160,000 Fixed manufacturing OH-Salaries $120,000 Total relevant costs to make $1,000,000 CALCULATION OF NET RELEVANT COST IF THEY ACCEPT THE OFFER A Reduction in relevant cost to make $1,000,000 B Additional cost of purchase $ 1,360,000 (34*40000) C=B-A Net addition of cost of purchase $ 360,000 D Variable cost of lights $ 653,360 (8*81670) E Supervisory and clarical staff costs $120,000 F=C+d+E Net relevant cost if they accept the offer $ 1,133,360