Question

Kearney, Inc., makes kitchen tools. Company management believes that a new model of coffee grinder would sell well at a price of $74.25. The company estimates unit materials costs to be $8.00 for the model, and overhead costs would average $35.50 per unit. The local wage rate for direct labor is $23.00 per hour. Kearney has a goal of earning an operating profit of 35.00 percent of manufacturing costs for each of its products.

Required:

What direct labor-hour input (hours per unit) could Kearney allow and still achieve its profit goal? (Round your answer to 2 decimal places.)

Answer 1

Highest acceptable cost = Selling price / 1.35

Selling price = Cost + profit

If cost is 1, then profit = 0.35

Selling price = 1 + 0.35

= 1.35

Highest acceptable cost = $74.25 / 1.35

= $55.00

Target labor cost = Total cost - Material cost - Overhead cost

= $55 - $8 - $35.50

= $11.50

Given direct labor wage rate = $23.00

Maximum direct labor time per unit = ($11.50 / $23.00)

= 0.50 per hour