Chenango Industries uses 11 units of part JR63 each month in the production of radar equipment....
Chenango Industries uses 11 units of part JR63 each month in the production of radar equipment. The cost of manufacturing one unit of JR63 is the following:
| Direct material | $ | 4,000 | |
| Material handling (20% of direct-material cost) | 800 | ||
| Direct labor | 33,000 | ||
| Manufacturing overhead (150% of direct labor) | 49,500 | ||
| Total manufacturing cost | $ | 87,300 | |
Material handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Chenango Industries’ annual manufacturing overhead budget is one-third variable and two-thirds fixed. Scott Supply, one of Chenango Industries’ reliable vendors, has offered to supply part number JR63 at a unit price of $57,000.
Required:
- If Chenango Industries purchases the JR63 units from Scott, the capacity Chenango Industries used to manufacture these parts would be idle. Should Chenango Industries decide to purchase the parts from Scott, the unit cost of JR63 would increase (or decrease) by what amount?
- Assume Chenango Industries is able to rent out all its idle capacity for $87,000 per month. If Chenango Industries decides to purchase the 11 units from Scott Supply, Chenango’s monthly cost for JR63 would increase (or decrease) by what amount?
- Assume that Chenango Industries does not wish to commit to a rental agreement but could use its idle capacity to manufacture another product that would contribute $171,000 per month. If Chenango’s management elects to manufacture JR63 in order to maintain quality control, what is the net amount of Chenango’s cost from using the space to manufacture part JR63?
Homework Answers
Answer:
1
|
Particular |
Amount $ |
|
Direct material |
4000 |
|
Material handling |
800 |
|
Direct labor |
33000 |
|
variable Manufacturing overhead |
16500 |
|
Total variable cost /Relevant cost |
54300 |
|
Purchase price from scott |
68400 |
|
Increase in unit cost(54300-68400) |
14100 |
As we can see that purchase from out side will increase per unit cost by $14,100 so company shoul make itself rather purchasing from outside
______________________________________________________
2
|
Particular |
Amount $ |
|
Rental revenue from idle space |
87,000 |
|
Less: |
|
|
Increase in monthly cost |
155100 |
|
Increase in monthly cost (155100-87000) |
68,100 |
_______________________________________________________
3
|
Particular |
Amount $ |
|
Contribution of the alternative product |
171,000 |
|
Savings in cost of acquiring JR63 |
155100 |
|
Net cost of using limited capacity to produce JR63 |
15,900 |
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