Question

Description:

You are consulting for the Kentucky Truck Plant Manager, Fergie Ferguson. Fergie is considering automating a major portion of the manufacturing process. She has provided you with as much data as she has. She has asked for to help her to determine which alternative, status quo or automation, will enhance the profitability of her plant.

Fergie is also concerned that the automated process might change the end-of-year planned Raw Material, Work-in-Process, and Finished Goods inventory that will be on hand.

Finally, Fergie is launching a new high-end truck, called the F-350 Thunderbird. The manufacturing process for the Thunderbird model is highly labor-intensive and will be unaffected by Fergie’s decision whether to implement the automated process. Given this, Fergie is interested in how much manufacturing overhead would be allocated to each unit of the Thunderbird truck under the status quo option, and how much manufacturing overhead would be allocated under the automated manufacturing process.

Deliverables:

• Identify the costs and benefits and value of each alternative. Identify those data that are relevant to the decision at hand
  1. Identify those data that are relevant to the decision at hand
  2. Offer a recommendation to Fergie Ferguson, including both quantitative and qualitative justification
• Identify the end-of-year Raw Material, Work-in-Process, and Finished Goods inventory balances for each alternative
• Calculate the Manufacturing Overhead allocated to each individual F-350 Thunderbird truck under each alternative
  1. Explain why there is a difference between the manufacturing overhead allocated to each Thunderbird truck
  2. Comment on whether you believe the manufacturing overhead allocation is appropriate under each alternative

Case Data:

Status Quo

• 300,000 units sold
• Average Selling Price = $50,000 per truck
• Expected Cost of Goods Sold
  • $22,000 Direct Materials per truck
  • $1,650 Direct Labor per truck
  • $1,800 Variable Manufacturing Overhead per truck
  • $1,365,000,000 Total Fixed Manufacturing Overhead
• Expected Selling, General, and Administrative (SG&A) Costs
  • $3,900 Variable SG&A per truck
  • $3,030,000,000 Total Fixed SG&A
• Beginning Inventory Balances:
  • Raw Materials = $75,000,000
  • Work-in-Process = $350,000,000
  • Finished Goods = $450,000,000
• Manufacturing Cost Flows:
  • Raw Materials Purchased = $6,660,000,000
  • Raw Materials introduced into Production = $6,650,000,000
  • Direct Labor Used = $500,000,000
  • Manufacturing Overhead Allocated to Work-in-Process = $1,925,000,000
  • Cost of Goods Manufactured = $9,050,000,000

• Pre-determined Manufacturing Overhead Rate Data (per Direct Labor Hour)
  • Estimated Total Manufacturing Overhead = $1,925,000,000
  • Estimated Direct Labor Hours Used = 10,000,000 hours

• Direct Labor Hours Budgeted for the F-350 Thunderbird = 7,800

Automated Manufacturing Process

• 300,000 units sold
• Average Selling Price = $50,000 per truck
• Expected Cost of Goods Sold
  • $22,000 Direct Materials per truck
  • $1,650 Direct Labor per truck
  • $1,350 Variable Manufacturing Overhead per truck
  • $1,780,000,000 Total Fixed Manufacturing Overhead
• Expected Selling, General, and Administrative (SG&A) Costs
  • $3,900 Variable SG&A per truck
  • $3,030,000,000 Total Fixed SG&A

• Beginning Inventory Balances:
  • Raw Materials = $75,000,000
  • Work-in-Process = $350,000,000
  • Finished Goods = $450,000,000
• Manufacturing Cost Flows:
  • Raw Materials Purchased = $6,730,000,000
  • Raw Materials introduced into Production = $6,710,000,000
  • Direct Labor Used = $330,000,000
  • Manufacturing Overhead Allocated to Work-in-Process = $2,190,000,000
  • Cost of Goods Manufactured = $9,190,000,000

• Pre-determined Manufacturing Overhead Rate Data (per Direct Labor Hour)
  • Estimated Total Manufacturing Overhead = $2,190,000,000
  • Estimated Direct Labor Hours Used = 6,000,000 hours

• Direct Labor Hours Budgeted for the F-350 Thunderbird = 7,800

Answer 1

Answer-1:

Automated Whether manufacturing Status Quo relevant to to the decision process Units sold 300,000 300,000 No Average Selling Price 50,000 $ 50,000 No Expected Cost of Goods Sold: 22,000 $ 1,650 $ 1,800 $ $ 1,365,000,000 $ 1,780,000,000 Direct Materials per truck Direct Labor per truck 22,000 No 1,650 1,350 No Variable Manufacturing Overhead per truck Yes Total Fixed Manufacturing Overhead Yes Expected Selling, General, and Administrative (SG&A) Costs: Variable SG&A per truck 3,900 $ $ 3,030,000,000 $ 3,030,000,000 3,900 No Total Fixed SG&A No Beginning Inventory Balances: Raw Materials 75,000,000 $ 350,000,000 $ 450,000,000 $ 450,000,000 75,000,000 No Work-in-Process 350,000,000 No Finished Goods No Manufacturing Cost Flows: $ 6,660,000,000 $ 6,730,000,000 $ 6,650,000,000 $ 6,710,000,000 500,000,000 $ $ 1,925,000,000 $ 2,190,000,000 $ 9,050,000,000 $ 9,190,000,000 Raw Materials Purchased Yes Raw Materials introduced into Production Yes Direct Labor Used 330,000,000 Yes Manufacturing Overhead Allocated to Work-in-Proces Yes Cost of Goods Manufactured Yes Pre-determined Manufacturing Overhead Rate Data (per Direct Labor Hour) $ 1,925,000,000 $ 2,190,000,000 10,000,000 $ Estimated Total Manufacturing Overhead Yes Estimated Direct Labor Hours Used 6,000,000 Yes %24

Answer-2:

Automated manufacturing Status Quo process 15,000,000,000 $ 15,000,000,000 $ Sales Cost of goods sold Beginning raw material inventory Add: Raw material purchased Total raw material available Less: Ending raw material inventory Raw material used in production Direct labour Manufacturing overhead applied to work in process Total manufacturing costs Add: Beginning work in process inventory 2$ 75,000,000 $ 75,000,000 6,660,000,000 $ 6,730,000,000 6,805,000,000 95,000,000 6,735,000,000 $ 85,000,000 $ 6,650,000,000 $ 500,000,000 $ 1,925,000,000 $ 9,075,000,000 $ 350,000,000 $ 9,425,000,000 $ 375,000,000 $ 9,050,000,000 $ 450,000,000 $ 9,500,000,000$ 500,000,000 $ 9,000,000,000$ 20,000,000 $ 8,980,000,000 $ 6,020,000,000 $ 6,710,000,000 330,000,000 2,190,000,000 9,230,000,000 350,000,000 9,580,000,000 390,000,000 9,190,000,000 450,000,000 Less: Ending work in process inventory Cost of goods manufactured Add: Beginning finished goods inventory 2$ Cost of goods available for sale 9,640,000,000 2$ Less: Ending finished goods inventory 360,000,000 2$ Unadjusted cost of goods sold 9,280,000,000 Less: Overapplied ovehead Adjusted cost of goods sold Gross margin 5,000,000 2$ 9,275,000,000 2$ 5,725,000,000 Less: Selling, General, and Administrative (SG&A) Costs: 2$ 1,170,000,000 $ 3,030,000,000 $ 1,820,000,000 $ Variable 1,170,000,000 Fixed costs 2$ 3,030,000,000 Net operating income 1,525,000,000

Comment: Fergie Ferguson should select Status Quo as this is more profitable as compared to Automated manufacturing process.

Answer-3:

Automated manufacturing Status Quo process Beginning raw material inventory Add: Raw material purchased 75,000,000 $ 6,660,000,000$ 75,000,000 6,730,000,000 Less: Raw material used in production 6,650,000,000 $ 6,710,000,000 85,000,000 $ Ending raw material inventory 95,000,000 Total manufacturing costs Add: Beginning work in process inventory Less: Cost of goods manufactured Ending work in process inventory 9,075,000,000$ 350,000,000 $ 9,050,000,000$ 375,000,000 $ 9,230,000,000 350,000,000 9,190,000,000 390,000,000 9,050,000,000$ Cost of goods manufactured 9,190,000,000 Add: Beginning finished goods inventory Less: Unadjusted cost of goods sold Ending finished goods inventory 450,000,000 $ 450,000,000 9,000,000,000$ 500,000,000 $ 9,280,000,000 360,000,000