Question

Anchor Company manufactures several different styles of jewelry cases. Management estimates that during the third quarter of this year the company will be operating at 80% of normal capacity. Because Anchor wants to increase use of plant capacity, the company will consider a special order. Anchor has received special order inquiries from two companies. The first order is from JCP, Inc., which would like to market a jewelry case similar to one of Anchor’s cases. The JCP case would be marketed under JCP’s own label. JCP has offered Anchor $5.75 per case for 20,000 cases to be shipped by October 1. The cost data for the Anchor jewelry case which is similar to the specifications of the JCP special order are as follows:

Regular selling price per unit	$9.00
Costs per unit
Materials	$2.50
Direct labor (.5 hrs. × $6)	3.00
Overhead (.25 machine hrs. × $4)	1.00
Total costs	$6.50

According to the specifications provided by JCP, the special order case requires less expensive raw materials. Consequently, materials will cost only $2.25 per case. Management has estimated that the remaining costs, labor time, and machine time will be the same as for the Anchor case.

The second special order was submitted by the Krage Company for 7,500 jewelry cases at $7.50 per case. These jewelry cases, like JCP’s, would be marketed under the Krage label and shipped by October 1. However, the Krage jewelry case is different from any jewelry case in the Anchor line. The estimated per unit costs of this case are as follows:

Materials	$3.25
Direct labor (.5 hrs. × $6)	3.00
Overhead (.5 machine hrs. × $4)	2.00
Total unit costs	$8.25

In addition, Anchor will incur $1,500 in additional set-up costs and will have to purchase a $2,500 special device to manufacture these cases; this device will be discarded once the special order is completed.

The Anchor manufacturing capabilities are limited to the total machine hours available. The plant capacity under normal operations is 90,000 machine hours per year or 7,500 machine hours per month. The budgeted fixed overhead for the year is $216,000. All manufacturing overhead costs are applied to production on the basis of machine hours at $4 per hour.

Anchor will have the entire third quarter to work on the special orders. Management does not expect any repeat sales to be generated from either special order. Company practice precludes Anchor from subcontracting any portion of an order when special orders are not expected to generate repeat sales.

Question

What is the excess capacity of machine hours available in the third quarter?

Answer 1

Particulars	JCP Inc	Krage Company	Total	Notes
a	Demand in unit	20,000.00	7,500.00
b	machine hours required for a unit	.25mhr	.5 mhr
c	Machine hours required to meet the entire demand of special order	5000	3750	8,750.00	a x b
d	Total Machine hours available at normal capacity(80%) for a month			7,500.00	Given
e	Therefore Machine hours available at full capacity for month			9,375.00	d/80%
f	So Machine hours available for a quarter (3 months)			28,125.00	e x 3 months
g	Machine hours required to meet the entire demand of special order			8,750.00	c
h	The Capacity used for special order in a quarter			31.11%	g/f*100
i	The excess Capacity available to meet the ordinary demands			68.89%	100%-h

j

The excess Machine hours available in the quarter

19,375.00 = 28125 x 68.89%

Answer 2

Particulars	JCP Inc	Krage Company	Total	Notes
a	Demand in unit	20,000.00	7,500.00
b	machine hours required for a unit	.25mhr	.5 mhr
c	Machine hours required to meet the entire demand of special order	5000	3750	8,750.00	a x b
d	Total Machine hours available at normal capacity(80%) for a month			7,500.00	Given
e	Therefore Machine hours available at full capacity for month			9,375.00	d/80%
f	So Machine hours available for a quarter (3 months)			28,125.00	e x 3 months
g	Machine hours required to meet the entire demand of special order			8,750.00	c
h	The Capacity used for special order in a quarter			31.11%	g/f*100
i	The excess Capacity available to meet the ordinary demands			68.89%	100%-h

j

The excess Machine hours available in the quarter

19,375.00 = 28125 x 68.89%