Question

Problem 8-24 Wright 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 50,000 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation. $13 Direct materials Direct labor Variable manufacturing overhead Direct fixed manufacturing overhead Allocated fixed manufacturing overhead Total unit cost 4 7 (40% salaries, 60% depreciation) 8 Clifton Clocks has offered to provide the timer units to Wright at a price of $34 per unit. If Wright accepts the offer, the current timer unit supervisory and clerical staff will be laid off. x Your answer is incorrect. Try again. Calculate the total relevant cost to make or buy the timer units. (Round answers to o decimal places, e.g. 5,250.) Buy Total relevant cose J M Total relevant cost x Your answer is incorrect. Try again. Assuming that Wright 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?

Answer 1

Relevant cost is equal to the avoidable costs
	Make	Buy
Direct Material	650,000
Direct Labor	250,000
Variable Manufacturing Overhead	200,000
Avoidable Fixed Mnaufacturing cost	140,000
Purchase cost		1,700,000
Total cost	1,240,000	1,700,000
No, Since cost of making is lower
Relevanct cost to make	1,240,000
Relevant cost to buy = Purchase cost - Margin from new product	1,340,000
Do Not Accept