Question

answer the problem questions

E6-5 Batch-Level Cost-Activity Relationship; Setup The fabrication department of Auto Engines, Inc. wants to estimate setup costs for Year 5. The company has determined that its setup costs are batch-related. Rele- vant data for the past five years are: Annual setup costs (average): Personnel $240,000 Other $ 45,600 Number of production runs per year (average) 120 Annual production volume (average) 48,000 units Required: 1. Determine the cost rate for each setup activity. 2. In Year 5 the company is planning on reducing the number of production runs by 20% from the previous five years level. Estimate the setup cost for Year 5. 3. Refer to the annual setup costs. Now assume that $45,600 (other setup costs) actually represents the costs of setup equipment. How would your answers to the above two questions change? What assumptions did you make with respect to the existing capacity and the increase (decrease) in the number of setups?

Answer 1

Solutions:

E6-5

1. Cost rate for each set up = Annual Set up costs / Number of production runs per year

                                            = 240,000 / 120 (Excluding other expense of $45600 as no specification is given)

                                           = $ 2000 per batch

2. Number of Production runs = 120

20% reduction                      =     24

Estimated Number of production runs = 120-24 = 96

Estimated set up cost for Year 5 = 96*2000 = $192000

3. Total Set up Cost = (Personnel + Equipment set up costs)

                               = 240,000 + 45,600

                               = 285600

Cost rate for each set up = 285600 / 120 = 2380

Estimated number of production run for year 5 ( calculated above) = 96

Estimated Set up cost for year 5 = 96*2380 = 228480

Break up would be as follows

Estimated Annual Set up costs (Average) – Year 5

• Personnel (240000/120)*96 = $192,000
• Others ( Equipment set up costs – (45600/120)*96 = $36480