Henry Horticultural, Ltd., 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 40,000 timers, the company has calculated the following unit costs. Direct fixed costs include supervisory and clerical salaries and equipment depreciation.

Talbert Time Pieces has offered to provide the timer units to Henry at a price of $32 per unit. If Henry accepts the offer, the current timer unit supervisory and clerical staff will be laid off.

Required
a. Assuming that Henry Horticultural has no other use for either the facilities or the equipment currently used to manufacture the timer units, should the company accept Talbert’s offer? Why or why not?
b. Assume that if Henry Horticultural accepts Talbert’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 $11.
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. Should Henry
Horticultural accept Talbert’s offer? Why or whynot?

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$12 Direct materials Direct labor Variable manufacturing overhead Direct fixed manufacturing overhead Allocated fixed manufacturing overhead 8 (30% salaries, 70% depreciation) Total unit cost $34