Question

Problem 8-24 (Part Level Submission) 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.

Direct materials $13

Direct labor 5

Variable manufacturing overhead 4

Direct fixed manufacturing overhead 7 (40% salaries, 60% depreciation)

Allocated fixed manufacturing overhead 8

Total unit cost $37

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. 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. 5,250.) Make Buy Total relevant cost $Entry field with correct answer 1240000 $Entry field with correct answer 1700000 question part (a2) Correct answer. Your answer is correct.

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? part

(b1) Assume that if Wright 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 100,000 of the new lights each year at a price of $12. Variable costs of the lights are expected to be $7 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 $ 1240000

Net relevant cost if they accept Clifton's offer $

Answer 1

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Wright Water Co.
Workings for Answer a 1
Particulars	Per unit	Remarks	Remarks
Direct materials	13.00	Relevant	It is a unit level cost so relevant.
Direct Labor	5.00	Relevant	It is a unit level cost so relevant.
Variable Manufacturing overhead	4.00	Relevant	It is a unit level cost so relevant.
Direct Fixed Manufacturing overhead	2.80	Relevant	Total is $ 7. But 40% is salary which is relevant because if product is purchased then there is no super vison cost on production. 60% is depreciation which is always irrelevant and sunk cost.
Allocated fixed manufacturing overhead	-	Irrelevant	Allocated fixed manufacturing overhead is always irrelevant and sunk cost.

Answer 1
Relevant cost per unit
Particulars	Amount $	Note
Direct materials	13.00
Direct Labor	5.00
Variable Manufacturing overhead	4.00
Fixed Manufacturing overhead	2.80
Relevant cost per unit of a product	24.80	A
Number of units	50,000.00	B
Relevant cost of making product	1,240,000.00	C=A*B
Price quoted by vendor	34.00	D
Number of units	50,000.00	See B
Purchase cost of product	1,700,000.00	E=D*B
Financial disadvantage	460,000.00	F=E-C

Right now the relevant cost is $ 24.80 while the vendor is giving the same product at $ 34. Hence proposal should not be accepted as company will lose $ 460,000 in total.

Answer b 1
Growing lights	Amount $	Note
Sell price	12.00
Less: Variable cost	7.00
Contribution per unit	5.00	G
Number of units	100,000.00	H
Total Contribution	500,000.00	I=G*H
Less: Financial disadvantage if capacity is idle	460,000.00	See F
Financial Advantage	40,000.00

If new product is launched then company will have net Financial advantage of $ 40,000. So then the proposal can be accepted.