Blossom Water Co. is a leading producer of greenhouse irrigation systems. Curren
ID: 359626 • Letter: B
Question
Blossom 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 40,390 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation.
Clifton Clocks has offered to provide the timer units to Blossom at a price of $34 per unit. If Blossom accepts the offer, the current timer unit supervisory and clerical staff will be laid off.
Assume that if Blossom 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 98,830 of the new lights each year at a price of $10. Variable costs of the lights are expected to be $7 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 $
Net relevant cost if they accept Clifton's offer $
Direct materials $12 Direct labor 7 Variable manufacturing overhead 4 Direct fixed manufacturing overhead 10 (30% salaries, 70% depreciation) Allocated fixed manufacturing overhead 9 Total unit cost $42Explanation / Answer
CALCULATE TOTAL RELEVANT COST TO MAKE OR BUY THE TIMER UNITS :
Make Buy
Direct material 484680
Direct labour 282730
Variable manufacturing overhead 161560
Supervisor's salary 121170
Purchase cost 1373260
Total relevant cost
1050140 1373260