2) Two alternative designs are under consideration for a tapered fastening pin. The fastening pins are sold for $0.80 each. Either design will serve equally well and will invole the same material and manufacturing cost except for the lathe and drill operations. Design A will require 16 hours of lathe time and 4.5 hours of drill time per 1,000 units. Design B will require 7 hours of lathe time and 12 hours of drill time per 1,000 units. The variable operating cost of the lathe, including labor, is $18.60 per hour. The variable operating cost of the drill, including labor, is $16.90 per hour. Finally there is a sunk cost of $5,000 for Design A and $9,000 for Design B due to obsolete tooling. a) Which design should be adopted if 125,000 units are sold each year? b) What is the annual saving over the other design?
2) Two alternative designs are under consideration for a tapered fastening pin. The fastening pins are sold for $0.80 each. Either design will serve equally well and will invole the same material and manufacturing cost except for the lathe and drill operations. Design A will require 16 hours of lathe time and 4.5 hours of drill time per 1,000 units. Design B will require 7 hours of lathe time and 12 hours of drill time per 1,000 units. The variable operating cost of the lathe, including labor, is $18.60 per hour. The variable operating cost of the drill, including labor, is $16.90 per hour. Finally there is a sunk cost of $5,000 for Design A and $9,000 for Design B due to obsolete tooling. a) Which design should be adopted if 125,000 units are sold each year? b) What is the annual saving over the other design?
Unlock all answers
Related questions
The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for the dolls is increasing, and management requests assistance from you in determining an economical sales and production mix for the coming year. The company has provided the following data:
| Product | Demand Next year (units) | Selling Price per Unit | Direct Materials | Direct Labor |
| Debbie | 66,000 | $37.00 | $4.30 | $3.50 |
| Trish | 58,000 | $ 5.00 | $1.20 | $0.84 |
| Sarah | 51,000 | $35.50 | $8.84 | $5.60 |
| Mike | 37,000 | $15.00 | $3.60 | $4.20 |
| Sewing kit | 341,000 | $ 9.60 | $4.80 | $0.49 |
| The following additional information is available: |
| a. | The companyâs plant has a capacity of 115,730 direct labor-hours per year on a single-shift basis. The companyâs present employees and equipment can produce all five products. |
| b. | The direct labor rate of $7 per hour is expected to remain unchanged during the coming year. |
| c. | Fixed costs total $545,000 per year. Variable overhead costs are $3 per direct labor-hour. |
| d. | All of the company's nonmanufacturing costs are fixed. |
| e. | The companyâs finished goods inventory is negligible and can be ignored. |
| Required: | ||||||||||||
| 1. | Determine the contribution margin per direct labor-hour expended on each product. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
| |||||||||||
| 2. | Calculate the the total direct labor-hours that will be required to produce the units estimated to be sold during the coming year. (Do not round intermediate calculations.)
|
| 3. | Based on response to Requirement 1 & 2, how much of 115,730 direct labor hours of capacity will be allocated to Walton Toy Companyâs various products?
|
| 4. | What is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource? Total margin contribution:
highest price per hour: |
Hampshire has always produced stick umbrellas. However, it is considering expanding its production to include collapsible umbrellas. This consideration has been spurred by Tours Today, a touring company that is interested in providing its customers with collapsible umbrellas imprinted with its logo. The management at Hampshire is currently working out a deal with the touring company to produce 3,000 collapsible umbrellas and believes it can sell those umbrellas for $14.00 each. Here are the costs that can be directly traced to this special order:
Direct Materials: $9,300
Direct Labor Hours: 600
Hourly Rate of Direct labor: $8.00
In the traditional costing approach, overhead is applied at the rate of $24.60 per labor hour. This expansion in production will add additional overhead costs. The total overhead costs (assuming production of the stick and collapsible umbrellas) to include the cost pools and cost drivers are provided in Table 2.
An alternative costing method that might benefit Hampshire is the implementation of activity-based costing (ABC). Hampshire would like to implement an ABC approach to analyze the production of this special order of collapsible umbrellas. The controller has assembled the following information:
| Stick | Collapsible | |
| Units Sold | 60,000 | 3,000 |
| Selling Price | $12.50 | $14.00 |
| Direct Material Cost per Unit | $3 | $3.10 |
| Direct Labor Cost per Hour | $7.50 | $8.00 |
| Variable Manufacturing Overhead | $0.40 | $0.40 |
| Variable Selling Costs | $1.10 | $1.10 |
| Labor Hours per Unit | 0.2 | 0.2 |
| Sales Orders | 120 | 1 |
| Purchase Orders | 50 | 3 |
| Production Runs | 45 | 6 |
| Material Moves | 86 | 10 |
| Machine Setups | 130 | 6 |
| Machine Hours | 525 | 32 |
| Inspections | 200 | 10 |
| Shipments | 60 | 3 |
Table 1: Direct Cost Information and Activities
| Activity | Activity Cost | Activity Cost Driver |
| Order Processing | $35,000 | Number of Sales Orders |
| Purchasing | $36,000 | Number of Purchase Orders |
| Material Handing | $28,000 | Material Moves |
| Machine Setup | $14,000 | Machine Setups |
| Production | $99,000 | Production Runs |
| Assembly | $80,000 | Machine Hours |
| Inspecting | $11,000 | Number of Inspections |
| Shipping | $7,500 | Number of Shipments |
Table 2: Activity Cost Pools and Cost Drivers
Another alternative to traditional costing and ABC is time-driven activity-based costing (TDABC). You will need to determine which of these three methods would be the best approach for the Hampshire Company. The following article may assist you in your analysis: Time-Driven Activity-Based Costing. Additionally, you may want to use the Shapiro Library to conduct further research on the three methods. You will need to defend your position when answering the prompts for the written portion of this section.
Using the information provided above, complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to all components of Section IV:
1.Calculate the allocation rates for each cost driver using ABC.
2.Use the traditional costing approach to calculate the total cost and the unit cost of the stick and collapsible umbrellas.
3.Use ABC to compute the total costs and the unit cost for the stick and collapsible umbrellas.
4.Compute the difference between the product cost per stick and collapsible umbrellas using the unit cost that you computed with the traditional approach and the one that you computed using ABC.
| Requirement 1 | |||
| Activity | Total Costs | Quantity of Cost Allocation Base | Overhead Allocation Rate |
| Order Processing | $ | X | $ |
| Purchasing | $ | X | $ |
| Material Handing | $ | X | $ |
| Machine Setup | $ | X | $ |
| Production | $ | X | $ |
| Assembly | $ | X | $ |
| Inspecting | $ | X | $ |
| Shipping | $ | X | $ |
| Requirement 2 | |||
| Traditional Costing | |||
| Stick Umbrella | Collapsible Umbrella | Total | |
| Revenues | $ | $ | $ |
| Direct Materials | $ | $ | $ |
| Direct Labor | $ | $ | $ |
| Variable Overhead | $ | $ | $ |
| Variable Selling Costs | $ | $ | $ |
| Allocated Fixed Overhead | $ | $ | $ |
| Total Costs | $ | $ | $ |
| Operating Income | $ | $ | $ |
| Operating Income % | % | % | |
| Per Unit Operating Income | $ | $ | |
| Requirement 3 | |||
| Activity-Based Costing | |||
| Stick Umbrella | Collapsible Umbrella | Total | |
| Revenues | $ | $ | $ |
| Direct Materials | $ | $ | $ |
| Direct Labor | $ | $ | $ |
| Variable Overhead | $ | $ | $ |
| Variable Selling Costs | $ | $ | $ |
| Order Processing Costs | $ | $ | $ |
| Purchasing Costs | $ | $ | $ |
| Material Handing Costs | $ | $ | $ |
| Machine Setup Costs | $ | $ | $ |
| Production Costs | $ | $ | $ |
| Assembly Costs | $ | $ | $ |
| Inspecting Costs | $ | $ | $ |
| Shipping Costs | $ | $ | $ |
| Total Costs | $ | $ | $ |
| Operating Income | $ | $ | $ |
| Operating Income % | % | % | |
| Per Unit Operating Income | $ | $ | |
| Requirement 4 | |||
| Costs per Unit | Stick Umbrella | Collapsible Umbrella | |
| Traditional | $ | $ | |
| ABC | $ | $ | |
| Difference | $ | $ | |
| Requirement 5 | |||
