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 40,780 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 8 Total unit cost $38 Clifton Clocks has offered to provide the timer units to Cullumber at a price of $32 per unit. If Cullumber accepts the offer, the current timer unit supervisory and clerical staff will be laid off. Warning Don't show me this message again for the assignment Ok Cancel Collapse question part (a1) Correct answer. Your answer is correct. Calculate the total relevant cost to make or buy the timer units. (Round answers to 0 decimal places, e.g. 5,275.) 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 93,050 of the new lights each year at a price of $12. Variable 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.

Answer 1

If Cullumber accepts the offer, the current timer unit supervisory and clerical staff will be laid off.

• If Cullumber accepts the offer its net profits will decrease by ($309,928)

If Cullumber accepts the offer, and uses the freed-up manufacturing facilities to manufacture a new line of growing lights.

• Cullumber's net profits will decrease by ($30,778)

Step-by-step explanation:

annual production of 40,780 timers

Direct materials $12

Direct labor $7

Variable manufacturing overhead $3

Direct fixed manufacturing overhead $8 (30% supervisory and clerical salaries, 70% equipment depreciation)

Allocated fixed manufacturing overhead $8

total cost per unit = $38 per unit x 40,780 = $1,549,640

40,780 timers have been offered at $32 per timer = $1,304,960

scenario 1: Cullumber accepts the offer and lays off personnel:

Keep producing Purchase Differential

clocks clocks amount

Production costs $995,032 $995,032

(unavoidable fixed

costs not included)

Purchase costs $1,304,960 ($1,304,960)

total costs $995,032 $1,304,960 ($309,928)

If Cullumber accepts the offer its net profits will decrease by $309,928

relevant costs / revenues related to accepting the offer:

93,050

scenario 1: Cullumber accepts the offer and uses the freed-up manufacturing facilities to manufacture a new line of growing lights.

Keep producing Purchase Differential

clocks clocks amount

Production costs $995,032 $995,032

(unavoidable fixed

costs not included)

Purchase costs $1,304,960 ($1,304,960)

Revenue from ($279,150) $279,150

production of lights

(contribution margin

x 93,050 units)

total costs $995,032 $1,025,810 ($30,778)