Question

A single-component product is estimated for cost and price for a lot of 175 units. The operation estimates for this product are as follows: Operation Setup (hr) 0.1 Shear Pierce Countersin Cycle (hr/unit 0.001 0.038 0.043 0.5 0.6 0.2 Brake Weld Grind Deburr 0.010 0.035 0.020 0.006 0.1 0.4 Average shop labor is $17.25 per hr. Factory overhead is 75% of direct labor, material cost and overhead per unit is $0.075, and G&A is 25% of the cost of goods manufactured. There is no selling or contingency cost. The markup on full cost is 20%. a) Develop a system of cost estimating, and find the unit and lot cost and price. b) Which operation is most costly? If a 50% reduction can be achieved in this operation. what addition to profit would be expected at the same selling price? (Hint: Assume that profit is increased only by direct-labor cost reduction)

Answer 1

Calculation of direct labour cost for various operations:

	A	B	C=B X 175	D=A+C	E=D X $17.25	F=E/175
operation	setup(hr)	cycle(hr/unit)	cycle (hr) for lot	total hr	total cost for lot ($)	cost per unit ($)
shear	0.1	0.001	0.175	0.275	4.74375	0.027107143
pierce	0.5	0.038	6.65	7.15	123.3375	0.704785714
countersink	0.3	0.043	7.525	7.825	134.98125	0.771321429
brake	0.6	0.01	1.75	2.35	40.5375	0.231642857
weld	0.2	0.035	6.125	6.325	109.10625	0.623464286
grind	0.1	0.02	3.5	3.6	62.1	0.354857143
deburr	0.4	0.006	1.05	1.45	25.0125	0.142928571
TOTAL					499.81875	2.856107143

Calculation of total cost

	cost for lot($)	cost per unit ($)
Factory overhead	374.8640625	2.142080357
Direct labour cost	499.81875	2.856107143
material cost and overhead	13.125	0.075
cost of goods manufactured	887.8078125	5.0731875
G&A	221.9519531	1.268296875
Cost of goods sold	1109.759766	6.341484375
profit	221.9519531	1.268296875
sales price	1331.711719	7.60978125

b) As it is clear from above table that countersink operation is most costly. If 50% reduction is available on this operation, new labour cost for lot will be = $(499.81875 - 50% of 134.98125) = $432.328125

Calculaion of new profit

	cost for lot($)
Factory overhead	324.2460938
Direct labour cost	432.328125
material cost and overhead	13.125
cost of goods manufactured	769.6992188
G&A	192.4248047
Cost of goods sold	962.1240234
profit	369.5876956
sales price	1331.711719

Thus profit will increase by $147.6357425.