Reference no: EM133090940

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 40,500 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 3

Direct fixed manufacturing overhead 8 (30% salaries, 70% depreciation)

Allocated fixed manufacturing overhead 10

Total unit cost $38

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

Required -

(a1) Calculate the total relevant cost to make or buy the timer units.

(a2) Assuming that Crane 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?

(b1) Assume that if Crane 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 94,550 of the new lights each year at a price of $10. 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.

(b2) Should Crane Water accept Clifton's offer?