Question

Crane 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 46,000 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 2 Direct fixed manufacturing overhead 9 (30% salaries, 70% depreciation) Allocated fixed manufacturing overhead 7 Total unit cost $37 Clifton Clocks has offered to provide the timer units to Crane at a price of $33 per unit. If Crane accepts the offer, the current timer unit supervisory and clerical staff will be laid off. (a1) 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 $enter a dollar amount rounded to 0 decimal places $enter a dollar amount rounded to 0 decimal places

Answer 1

Answer:

Crane Water Co.

Total relevant cost to make or buy     Make    Buy

Direct materials                                       $12

Direct labor                                                 7

Variable manufacturing overhead            2

Direct fixed manufacturing overhead      6

Total relevant cost to make =              $27      $33

Explanation:

a) Data and Calculations:

Annual production of timers = 46,000

Direct materials                                      $12

Direct labor                                                7

Variable manufacturing overhead           2

Direct fixed manufacturing overhead      9

(30% salaries, 70% depreciation)

Allocated fixed manufacturing overhead 7

Total unit cost                                        $37

Clifton Clocks offer price = $33

Total relevant cost to make or buy     Make    Buy

Direct materials                                       $12

Direct labor                                                 7

Variable manufacturing overhead            2

Direct fixed manufacturing overhead      6

Total relevant cost to make =              $27      $33

b) Crane Water Co. will be in a better position if it continues to make the timer.  It should not accept the offer from Clifton Clocks.  The relevant cost to make is lower than the relevant cost to buy the timer from Clifton Clocks.