Question

Problem 8-24 (Part Level Submission) Wildhorse 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 40,960 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 4 Direct fixed manufacturing overhead 9 (30% salaries, 70% depreciation) Allocated fixed manufacturing overhead 5   Total unit cost $37 Clifton Clocks has offered to provide the timer units to Wildhorse at a price of $36 per unit. If Wildhorse accepts the offer, the current timer unit supervisory and clerical staff will be laid off. (a1) Your answer is correct. Calculate the total relevant cost to make or buy the timer units. (Round answers to 0 decimal places, e.g. 5,250.) Make Buy Total relevant cost    $ $ LINK TO TEXT LINK TO VIDEO Attempts: 4 of 15 used (a2) Your answer is correct. Assuming that Wildhorse Water has no other use for either the facilities or the equipment currently used to manufacture the timer units, should the company accept Clifton’s offer? YesNo LINK TO TEXT LINK TO VIDEO Attempts: 2 of 15 used (b1) Assume that if Wildhorse 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 94,260 of the new lights each year at a price of $13. Variable costs of the lights are expected to be $10 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    $

Answer 1

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Wildhorse Water Co. Relevant costs are those costs which are directly identifiable with products and will not be incurred at all if the production stopped. In the present case only Direct materials, Direct labor and Variable manufacturing overhead are relevant. All direct fixed manufacturing overhead and Allocated fixed manufacturing overhead are sunk costs as these will continued to be incurred even if the production is stopped. Ans (a1) Relevant costs Direct materials                 12.00 Direct labor                   7.00 Variable manufacturing overhead                   4.00 Relevant costs per unit                 23.00 Buy price per unit                 36.00 Buy price is more then make price so Wildhorse Water Co. should not buy but make the product. Ans (a2) No Because make price is $ 25.70 and buy price is $ 36. Buy price is more then make price so Wildhorse Water Co. should not buy but make the product. It does not matter because if there is no other use for either the facilities or the equipment currently used to manufacture the timer units as they are all sunk costs. Ans (a3) Relevant costs per unit                 23.00 Units to buy         40,960.00 Total costs to make       942,080.00 Purchase price per unit                 36.00 Units to buy         40,960.00 Purchase costs 1,474,560.00 Units sold         94,260.00 Sell price                 13.00 Variable cost                 10.00 Contribution per unit                   3.00 Contribution amount       282,780.00 Net cost of buy 1,191,780.00 Net costs to make still less than Net cost of buy so Wildhorse Water Co. should not buy but make the product.