Question

General Instrumentation Corporation manufactures dashboard instruments for heavy construction equipment. The firm is based in Baltimore, but operates several divisions in the United States, Canada, and Europe. The Hudson Bay Division manufactures complex electrical panels that are used in a variety of the firm's instruments. There are two basic types of panels. The high-density panel (HDP) is capable of many functions and is used in the most sophisticated instruments, such as tachometers and pressure gauges. The low-density panel (LDP) is much simpler and is used in less complicated instruments. Although there are minor differences among the different high-density panels, the basic manufacturing process and production costs are the same. The high-density panels require considerably more skilled labor than the low-density panels, but the unskilled labor needs are about the same. Moreover, the direct materials in the high-density panel run substantially more than the cost of materials in the low-density panels. Production costs are summarized as follows: LDP HDP Unskilled labor (0.80 hour @ $8 $ 8 $10) Skilled labor: LDP (0.25 hour @ $20) HDP (1.00 hours @ $20) Raw material Purchased components 7 13 Variable overhead 8 Total variable cost $34 $66

Answer 1

ANS. HUDSON BY DIVISION MANUFACTURES TWO TYPES OF PANEL

LOW DENSITY AND HIGH DENSITY

TOTAL VARIABLE COST FOR THE TWO PANEL GIVEN BELOW

LDP HDP

UNSKILLED LABOR

.8 HOUR @10 $8 $8

SKILLED LABOR

LDP .25@20 5

HDP 1.00@20 20

RAW MATERIAL 6 9

PURCHASED COMPONENT 7 13

VARIABLE OVERHEAD 8 16

     

    34 66   

SELL PRICE     42 126

CONTRIBUTION PER UNIT $8 $60

FIXED OVERHEAD $140000

SKILLED LABOR .25 1.00

RATIO OF FIXED OVERHEAD 28000 112000

HUDSON CAN SELL UP TO7000 UNITS OF HDP REQUIRES 7000 HRS OF SKILLED LABOR

IT CAN MEED THE DEMAND OF TCH-320 AS IT HAVE SPARED CAPACITY OF SKILLED LABOR WHICH REQUIRES 12000 HRS FOR 12000 UNITS

TOTAL SKILLED LABOR NEEDED 12000+7000=19000 HRS OF SKILLED LABOR

BALANCE 44000-19000=25000 WHICH WOULD ABLE TO PRODUCE 100000 UNIT OF LDP

PRESENT VARIABLE COST OF TCH-320

UNSKILED LABOR .8 @ 12 9.6

SKILLED LABOR 3 HRS @18 54.0

RAW MATERIAL 12.4

PURCHASED COMONENT 170.0

VARIABLE OVERHEAD 140

  

260.0

AFTER ACQUIRING COMONENT FROM HUDSON NEW VARIABLE COST IS

UNSKILLED LABOR    9.6

SKILLED LABOR 3 HRS @18 54.0

ADDITIONL SKILLED LABOR 54.0

RAW MATERIAL 12.4

VARIABLE OVERHEAD 14.0

COST OF TRANSPORTING 5.0

PURCHASED COMPONENT 66.0

215.0

WHICH IS LOWER THAN PREVIOUS COST OF 260 BY45PER UNIT

HENCE IT IS ADVISABLE TO PURCHASE THE COMPONENT

MINIMUM