Question

IPort Products makes cases for portable music players in two processes, cutting and sewing. The cutting process has a capacity of 110,000 units per year; sewing has a capacity of 140,000 units per year. Cost information follows:

Inspection and testing costs	$	45,000
Scrap costs (all in the cutting dept.)		146,850

Demand is very strong. At a sales price of $14.00 per case, the company can sell whatever output it can produce.

IPort Products can start only 110,000 units into production in the Cutting Department because of capacity constraints. Defective units are detected at the end of production in the Cutting Department. At that point, defective units are scrapped. Of the 110,000 units started at the cutting operation, 16,500 units are scrapped. Unit costs in the Cutting Department for both good and defective units equal $8.90 per unit, including an allocation of the total fixed manufacturing costs of $242,000 per year to units.

Direct materials (variable)	$	4.40
Direct manufacturing, setup, and materials handling labor (variable)		2.30
Depreciation, rent, and other overhead (fixed)		2.20
Total unit cost	$	8.90

The fixed cost of $2.20 per unit is the allocation of the total fixed costs of the Cutting Department to each unit, whether good or defective. (The total fixed costs are the same whether the units produced in the Cutting Department are good or defective.)

The good units from the Cutting Department are sent to the Sewing Department. Variable manufacturing costs in the Sewing Department are $1.40 per unit and fixed manufacturing costs are $35,000 per year. There is no scrap in the Sewing Department. Therefore, the company’s total sales quantity equals the Cutting Department’s good output. The company incurs no other variable costs.

The company’s designers have discovered a new type of direct material that would reduce scrap in the Cutting Department to 5,500 units. However, using the new material would increase the direct materials costs to $6.60 per unit in the Cutting Department for all 110,000 units. Recall that only 110,000 units can be started each year.

Required:

a. Compute profit under each alternative. Assume that inspection and testing costs will be reduced by $13,000 if the new material is used. Fixed costs in the sewing department will remain the same whether 93,500 or 104,500 units are produced. (Do not round intermediate calculations. Round "Price per unit" to 2 decimal places.

Current material new material

the number of units sold

price per unit

sales revenue

variable cutting manufacturing costs

materials

other variables

fixed cutting manufacturing costs

variable sewing costs

fixed sewing costs

inspection and testing

profit

Answer 1

a.Calculation of profit:

	Current Material	New Material
the number of units sold	93,500	104,500
price per unit	14	14
sales revenue	1,309,000	1,463,000
variable cutting manufacturing costs:
Materials	484,000	726,000
other variables	253,000	253,000
fixed cutting manufacturing costs	242,000	242,000
variable sewing costs	130,900	146,300
fixed sewing costs	35,000	35,000
inspection and testing	45,000	32,000
profit	119,100	28,700

Hence, it is better to use old material

Note: Direct Material Cost and Other Variable Cost in the cutting department will be incurred for all the 110,000 units.

Fixed Cost will remain same under both the alternatives

Scrap cost given in the question is nothing but 8.9*number of units scraped. It has been already charged in total cost, it need not charged again