Concept explainers
Brees, Inc., a manufacturer of golf carts, has just received an offer from a supplier to provide 2,600 units of a component used in its main product. The component is a track assembly that is currently produced internally. The supplier has offered to sell the track assembly for $66 per unit. Brees is currently using a traditional, unit-based costing system that assigns overhead to jobs on the basis of direct labor hours. The estimated traditional full cost of producing the track assembly is as follows:
Prior to making a decision, the company’s CEO commissioned a special study to see whether there would be any decrease in the fixed overhead costs. The results of the study revealed the following:
3 setups—$1,160 each (The setups would be avoided, and total spending could be reduced by $1,160 per setup.)
One half-time inspector is needed. The company already uses part-time inspectors hired through a temporary employment agency. The yearly cost of the part-time inspectors for the track assembly operation is $12,300 and could be totally avoided if the part were purchased.
Engineering work: 470 hours, $45/hour. (Although the work decreases by 470 hours, the engineer assigned to the track assembly line also spends time on other products, and there would be no reduction in his salary.)
75 fewer material moves at $30 per move.
Required:
- 1. Ignore the special study, and determine whether the track assembly should be produced internally or purchased from the supplier.
- 2. Now, using the special study data, repeat the analysis.
- 3. Discuss the qualitative factors that would affect the decision, including strategic implications.
- 4. After reviewing the special study, the controller made the following remark: “This study ignores the additional activity demands that purchasing would cause. For example, although the demand for inspecting the part on the production floor decreases, we may need to inspect the incoming parts in the receiving area. Will we actually save any inspection costs?” Is the controller right?
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Chapter 17 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Box Springs. Inc., makes two sizes of box springs: queen and king. The direct material for the queen is $35 per unit and $55 is used in direct labor, while the direct material for the king is $55 per unit, and the labor cost is $70 per unit. Box Springs estimates it will make 4,300 queens and 3,000 kings in the next year. It estimates the overhead for each cost pool and cost driver activities as follows: How much does each unit cost to manufacture?arrow_forwardRulers Company is a neon sign company that estimated overhead will be $60,000, consisting of 1,500 machine hours. The cost to make Job 416 is $95 in neon, 15 hours of labor at $13 per hour, and five machine hours. During the month, it incurs $95 in indirect material cost, $130 in administrative labor, $320 in utilities, and $350 in depreciation expense. What is the predetermined overhead rate if machine hours are considered the cost driver? What is the cost of Job 416? What is the overhead incurred during the month?arrow_forwardKando Company currently pays $14 per unit to buy a part for a product it manufactures. Instead, Kando could make the part for per unit costs of $6 for direct materials, $4 for direct labor, and $2 for incremental overhead. Kando normally applies overhead costs using a predetermined rate of 200% of direct labor cost. (a) Prepare a make or buy analysis of costs for this part. (b) Should Kando make or buy the part? Make Buy Direct materials Direct labor Overhead Cost to buy Cost per unit Company should:arrow_forward
- Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information. Estimated wheels produced Direct labor hours per wheel Activity Cost Pools Setting up machines Assembling Inspection Car Total estimated overhead costs for the two product lines are $835,200. Assembling 39,000 Hermann is not satisfied with the traditional method of allocating overhead because he believes that most of the overhead costs relate to the truck wheels product line because of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better understand these costs. Setting up machines $ Inspection 1 Truck 11,000 S Estimated Use of Cost Drivers 1.000 setups 72.000 labor hours 1.200 inspections 3 Compute the activity-based overhead rates for these three cost pools. Estimated Overhead Overhead Rates Costs $216,000 360,000 259,200arrow_forwardHaver Company currently pays an outside supplier $35 per unit for a part for one of its products. Haver is considering two alternative methods of making the part. Method 1 for making the part would require direct materials of $15 per unit, direct labor of $18 per unit, and incremental overhead of $3 per unit. Method 2 for making the part would require direct materials of $15 per unit, direct labor of $12 per unit, and incremental overhead of $7 per unit. Required: 1. Compute the cost per unit for each alternative method of making the part. 2. Should Haver make or buy the part? If Haver makes the part, which production method should it use? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Should Haver make or buy the part? If Haver makes the part, which production method should it use? Should Haver make or buy the part? If Haver makes the part, which production method should it use?arrow_forwardTroy Engines, Limited, manufactures a variety of engines for use in heavy equipment. The company has always produced all of the parts for its engines, including the carburetors. An outside supplier offered to sell one type of carburetor to Troy Engines, Limited, for a cost of $30 per unit. To evaluate this offer, Troy Engines, Limited, summarized the cost of producing the carburetor internally as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Per Unit $ 12 8 2 9* Required 1 Required 2 Required 3 Required 4 12 $43 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required: 1. If the company has no alternative use for the facilities being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 12,000 carburetors from the outside supplier? 2. Should the outside supplier's offer be accepted?…arrow_forward
- Troy Engines, Limited, manufactures a variety of engines for use in heavy equipment. The company has always produced all of the parts for its engines, including the carburetors. An outside supplier offered to sell one type of carburetor to Troy Engines, Limited, for a cost of $30 per unit. To evaluate this offer, Troy Engines, Limited, summarized the cost of producing the carburetor internally as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Per 19,000 Units Unit Per Year $ 12 $ 228,000 10 3 190,000 57,000 3* 6 57,000 114,000 $ 34 $ 646,000 "One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required: 1. If the company has no alternative use for the facilities being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 19,000 carburetors from the outside supplier? 2. Should the outside…arrow_forwardTroy Engines, Limited, manufactures a variety of engines for use in heavy equipment. The company has always produced all of the parts for its engines, including the carburetors. An outside supplier offered to sell one type of carburetor to Troy Engines, Limited, for a cost of $40 per unit. To evaluate this offer, Troy Engines, Limited, summarized the cost of producing the carburetor internally as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Per Unit 15,000 Units Per Year $ 15 11 2 9* 12 $ 225,000 165,000 30,000 135,000 180,000 $ 49 $ 735,000 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required: 1. If the company has no alternative use for the facilities being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier? 2. Should the…arrow_forwardQriole Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, William Brown, has developed the following information: Estimated wheels produced Direct labour hours per wheel Car Car wheels $ Truck 45,000 11,000 4 Total estimated overhead costs for the two product lines are $1,340,000. Calculate the overhead cost assigned to the car wheels and truck wheels, assuming that direct labour hours are used to allocate overhead costs. 8 180,000arrow_forward
- Troy Engines, Limited, manufactures a variety of engines for use in heavy equipment. The company has always produced all of the parts for its engines, including the carburetors. An outside supplier offered to sell one type of carburetor to Troy Engines, Limited, for a cost of $40 per unit. To evaluate this offer, Troy Engines, Limited, summarized the cost of producing the carburetor internally as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Per Unit $ 18 9 2 9* 12 $ 50 18,000 Units Per Year $ 324,000 162,000 36,000 162,000 216,000 $ 900,000 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required: 1. If the company has no alternative use for the facilities being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 18,000 carburetors from the outside supplier? 2. Should the outside…arrow_forwardTerpsCo allocates its factory overhead based on the traditional method because the production process is labor-intensive. The cost driver for allocating overhead is direct labor hours. During the period, the company produced 5,000 units of Product A requiring a total of 1,600 labor hours and 2,500 units of Product B requiring a total of 400 labor hours. What allocation rate should be used if the company incurs overhead costs of $20,000? Group of answer choices A. None of these. B. $2.67 per unit C. $12.50 per labor hour for Product A and $50 per labor hour for Product B D. $10 per labor hourarrow_forwardEllis Equipment (EE), manufactures three models of lawn tractor: EE-1000, EE-1800, and EE-2800. Because of the different materials used, production processes for each model differ significantly in terms of machine types and time requirements. Once parts are produced, however, assembly time per unit required for each type of tractor is similar. For this reason, EE allocates overhead on the basis of machine-hours. Last quarter, the company shipped 8,000 EE-1000s, 3,200 EE-1800s, and 800 EE-2800s. The revenues and expenses for the last quarter were as follows: ELLIS EQUIPMENT Income Statement For the Quarter Ended June 30 EE-1000 EE-1800 EE-2800 Total Sales revenue $ 12,800,000 $ 8,000,000 $ 3,520,000 $ 24,320,000 Direct costs Direct materials 4,800,000 3,200,000 1,120,000 9,120,000 Direct labor 1,680,000 768,000 230,400 2,678,400 Variable overhead Setting up machines 1,400,000 Quality testing 1,800,000 Painting 780,000…arrow_forward
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