Question

Sandhill 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 40,860 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation.

Direct materials		$11
Direct labor		6
Variable manufacturing overhead		4
Direct fixed manufacturing overhead		8	(30% salaries, 70% depreciation)
Allocated fixed manufacturing overhead		5
Total unit cost		$34

Clifton Clocks has offered to provide the timer units to Sandhill at a price of $36 per unit. If Sandhill accepts the offer, the current timer unit supervisory and clerical staff will be laid off.

Assume that if Sandhill 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 89,400 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

Solution:
Relevent cost to make
Direct material	$11
Direct Labor	$6
Variable overhead	$4
Relevent cost per unit	$21
Units required	40,860
Total		$858,060
Net relevent cost if they accept Clifton's offer
Cost of buy	$36
Units required	40,860
Total		$1,470,960
Less: Contrybution margin	$268,200
[89,400($12-$9)]
Net Relevent cost	$1,202,760
Fixed costs are irrelevent while deciding between Make or buy.
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