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Prob 14
Prob 14
14‐54
10 units of JR63 used each month in production of radar equipment.
Direct material $ 1,000
Material handling (20% of direct material cost) 200
Direct labor 8,000
Manufacturing overhead (150% of direct labor) 12,000
Total manufacturing cost $21,200
Material handling represents the direct variable costs of the Receiving
Department that are applied to direct materials and purchased
components on the basis of their cost. This is a separate charge in
addition to manufacturing overhead.
Annual manufacturing overhead budget is one‐third variable and two‐
thirds fixed.
Scott Supply has offered to supply part JR63 at a unit price of $15,000.
©Dr. Chula King
All Rights Reserved
Problem 14‐54 (continued)
Part 1: If Chenango decides to purchase the parts from Scott, would
the unit cost of JR63 increase or decrease? By what amount?
Incremental cost if purchased:
Purchase price $15,000
Material handling cost 3,000
Total $18,000
Incremental cost if manufactured:
Direct material $ 1,000
Material handling 200
Direct labor 8,000
,
Variable overhead (1/3 x $12,000) 4,000
Total $13,200
Increase in unit cost if purchased $ 4,800
©Dr. Chula King
All Rights Reserved
Problem 14‐54 (continued)
Part 2: Assume that Chenango is able to rent out all of its idle capacity
for $25,000/month. If Chenango decides to purchase the 10 units
from Scott Supply, Chenango’s monthly cost for JR63 would increase
(or decrease) by what amount?
Increase in monthly cost ($4 800 from part 1 x 10)
Increase in monthly cost ($4,800 from part 1 x 10) $48 000
$48,000
Rental revenue from idle space (25,000)
Increase in monthly cost $23,000
©Dr. Chula King
All Rights Reserved
Problem 14‐54 (continued)
Part 3: Assume that Chenango does not wish to commit to a rental
agreement but could use its idle capacity to manufacture another
product that would contribute $52,000/month. If management elects
to manufacture JR63 in order to maintain quality control, what is the
net amount of Chenango’ss cost from using the space to manufacture
net amount of Chenango cost from using the space to manufacture
part JR63?
Revenue lost by not manufacturing alternative product $52,000
Savings in cost of acquiring JR63 ($4,800 from part 1 x 10) (48,000)
Net cost of using limited capacity to produce JR63 $ 4,000
©Dr. Chula King
All Rights Reserved