Question

Martin Company manufactures a powerful cleaning solvent. The main ingredient in the solvent is a raw material called Echol. Information on the purchase and use of Echol follows:

Purchase of echol: Echol is purchased in 5-gallon containers at a cost of £110 per container. A discount of 2% is offered by the supplier for payment within 10 days, and Martin Company takes all discounts. Shipping costs, which Martin Company must pay, amount to £220 for an average shipment of 100 5-gallon containers of Echol.

Use of echol: The bill of materials calls for 13.30 quarts of Echol per bottle of cleaning solvent. (There are four quarts in a gallon.) About 5% of all Echol used is lost through spillage or evaporation (the 5.00 quarts above is the actual content per bottle). In addition, statistical analysis has shown that every 21st bottle is rejected at final inspection because of contamination.

The Total cost per 5-gallon container is?

The Standard cost per quart purchased is?

The Standard quantity per saleable bottle of solvent is?

The standard cost of Echol per bottle of cleaning solvent is?

Answer 1

The Total cost per 5-gallon container is	£110
The Standard cost per quart purchased is	£55
The Standard quantity per saleable bottle of solvent is	14.70 quarts
The standard cost of Echol per bottle of cleaning solvent is	£808.50

Cost per 5-gallon container	110
Less: 2% cash discount	2.20
Net cost	107.80
Add shipping cost per container (220 ÷ 100)	2.2
Total cost per 5-gallon container (a)	110
Number of quarts per container(5 gallons × 4 quarts per gallon) (b)	20
Standard cost per quart purchased (a) ÷ (b)	£55

Content per bill of materials	13.30
Add allowance for evaporation and spillage(13.30 quarts ÷ 0.95 = 14 quarts;14 quarts – 13.30 quarts = 0.70 quarts)	0.70
Total	14
Add allowance for rejected units(14 quarts ÷ 20 bottles)	0.70
Standard quantity per salable bottle of solvent	14.70 quarts

Standard Cost per Bottle = Standard quantity per salable bottle of solvent * Standard cost per quart purchased = 14.70*55 = £808.50