please answer and step by step with explain QUESTION3 Smith Industries has been
ID: 2414580 • Letter: P
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please answer and step by step with explain
QUESTION3 Smith Industries has been producing two components X12 and Y18, for use in production. Data regarding these two components is presented below X12 Y18 Machine hours required per unit Direct material Direct labour 2 2.0 hours 2.5 hours $2.50 $5.00 SA $4.00 $4.00 $2.50 $5.00 Variable manufacturing overhead-?$3.00 Fixed manufacturing overhead $4.00 Variable manufacturing overhead is applied on the basis of direct labour hours. Fixed manufacturing overhead is applied on the basis of machine hours. Smith Industries' annual requirement for these components is 8,000 units of X12 and 11,000 units of Y18. Recently, Smith Industries' management decided to devote additional machine time to other product lines resulting in only 31,000 machine hours per year that can be dedicated to the production of the components, X12 and Y18. An outside company has offered to sell Smith Industries the annual supply of the components, X12 and Y18, at prices of $11.50 for X12 and $13.50 for Y18. Smith Industries wants to schedule the otherwise idle 31,000 machine hours to produce components so that the company can minimise its costs and maximise its net benefits. Required: [show workings up to 2 decimal places, where applicable] a) Assume that Smith Industries decides to make all of component X12 and purchase component Y18 from an outside company as required. Determine the number of Y18 components to be purchased b) Independent of (a) above, which component (X12 or Y18) should Smith Industries plan to manufacture first with the limited machine hours available? Calculate the total financial benefit resulting from your answer. Define Relevant Costs and List examples of costs to be included under the definition and examples to be excluded c)Explanation / Answer
a)
Total Machine Hours
31000 Hours
Hours Consumed in Production of X12
Item
Units
Labour Hours per Unit
Total Labour Hour
X12
8000
2
16000
Hours Left for Production of Y 18 (31000 Hours-16000 Hours)
15000 Hours
Maximum Y 18 Units that can be produced in 15000 Machine Hours (15000 hours/2.5)
6000 Units
Units of Y18 to be purchased from market ( Total Requirement-6000)
(11000-6000)
5000 Units
b)
Statement of cost ( X12 to be Manufactured First)
Amount
Amount
Cost of manufacturing X12 8000 units
Direct Material (8000*2.5)
$ 20,000.00
Direct Labour (8000*5)
$ 40,000.00
Variable Manufacturing Overheads (8000*3)
$ 24,000.00
$ 84,000.00
Cost of manufacturing Y 18 6000 units
Direct Material (6000*4)
$ 24,000.00
Direct Labour (6000*4)
$ 24,000.00
Variable Manufacturing Overheads (6000*2.5)
$ 15,000.00
$ 63,000.00
Purchase Cost of 5000 Units of Y 18 (5000*13.5)
$ 67,500.00
Total Cost
$ 214,500.00
Statement of cost ( Y18 to be Manufactured First)
Amount
Amount
Cost of manufacturing Y18 11000 units
Direct Material (11000*4)
$ 44,000.00
Direct Labour (11000*4)
$ 44,000.00
Variable Manufacturing Overheads (11000*2.5)
$ 27,500.00
$ 115,500.00
Cost of manufacturing X12 1750 units
Direct Material (1750*2.5)
$ 4,375.00
Direct Labour (1750*5)
$ 8,750.00
Variable Manufacturing Overheads (1750*3)
$ 5,250.00
$ 18,375.00
Purchase Cost of 6250 Units of X12 (6250*11.5)
$ 71,875.00
Total Cost
$ 205,750.00
Note* Fixed cost per Unit Will be excluded since it is Irrelevant cost and occurs even if no production is done.
Conclusion:
If Y18 is manufactured First then cost will be lower in comparison to cost when X12 is Manufactured First
Net Benefit By Produbing Component Y 18 First will be 8750 Dollars Calculated as follows.
Total Cost when X12 is Manufactured First
$ 214,500.00
Total Cost when Y18 is Manufactured First
$ 205,750.00
Net Benefit
$ 8,750.00
Working Notes ( X12 to be purchased if Y18 is Manufactured First)
Item
Units
Labour Hours per Unit
Total Labour Hour
Y 18
11000
2.5
27500
Hours Left for Production of X12 (31000 Hours-27500 Hours)
3500 Hours
Maximum X12 Units that can be produced in 3500 Machine Hours (3500 hours/2)
1750 Units
Units of X 12 to be purchased from market ( Total Requirement-1750)
(8000-1750)
6250 Units
c)
Relevant cost is the cost which can be completely eliminated if Production is not done.In other words Relevent cost change according to change in production units.
Irrelevant cost such as Fixed cost or Unavoidable cost will be excluded when decision is taken whether to produce or buy from market.
Expenses of Relevant cost are Variable Direct Material,variable Direct Labour, Variable production Overheads,Variable selling overheads,etc.
Take the example given above .In calculating Total Cost Fixed cost is not included because it will be same even if production is zero.
a)
Total Machine Hours
31000 Hours
Hours Consumed in Production of X12
Item
Units
Labour Hours per Unit
Total Labour Hour
X12
8000
2
16000
Hours Left for Production of Y 18 (31000 Hours-16000 Hours)
15000 Hours
Maximum Y 18 Units that can be produced in 15000 Machine Hours (15000 hours/2.5)
6000 Units
Units of Y18 to be purchased from market ( Total Requirement-6000)
(11000-6000)
5000 Units
b)
Statement of cost ( X12 to be Manufactured First)
Amount
Amount
Cost of manufacturing X12 8000 units
Direct Material (8000*2.5)
$ 20,000.00
Direct Labour (8000*5)
$ 40,000.00
Variable Manufacturing Overheads (8000*3)
$ 24,000.00
$ 84,000.00
Cost of manufacturing Y 18 6000 units
Direct Material (6000*4)
$ 24,000.00
Direct Labour (6000*4)
$ 24,000.00
Variable Manufacturing Overheads (6000*2.5)
$ 15,000.00
$ 63,000.00
Purchase Cost of 5000 Units of Y 18 (5000*13.5)
$ 67,500.00
Total Cost
$ 214,500.00
Statement of cost ( Y18 to be Manufactured First)
Amount
Amount
Cost of manufacturing Y18 11000 units
Direct Material (11000*4)
$ 44,000.00
Direct Labour (11000*4)
$ 44,000.00
Variable Manufacturing Overheads (11000*2.5)
$ 27,500.00
$ 115,500.00
Cost of manufacturing X12 1750 units
Direct Material (1750*2.5)
$ 4,375.00
Direct Labour (1750*5)
$ 8,750.00
Variable Manufacturing Overheads (1750*3)
$ 5,250.00
$ 18,375.00
Purchase Cost of 6250 Units of X12 (6250*11.5)
$ 71,875.00
Total Cost
$ 205,750.00
Note* Fixed cost per Unit Will be excluded since it is Irrelevant cost and occurs even if no production is done.
Conclusion:
If Y18 is manufactured First then cost will be lower in comparison to cost when X12 is Manufactured First
Net Benefit By Produbing Component Y 18 First will be 8750 Dollars Calculated as follows.
Total Cost when X12 is Manufactured First
$ 214,500.00
Total Cost when Y18 is Manufactured First
$ 205,750.00
Net Benefit
$ 8,750.00
Working Notes ( X12 to be purchased if Y18 is Manufactured First)
Item
Units
Labour Hours per Unit
Total Labour Hour
Y 18
11000
2.5
27500
Hours Left for Production of X12 (31000 Hours-27500 Hours)
3500 Hours
Maximum X12 Units that can be produced in 3500 Machine Hours (3500 hours/2)
1750 Units
Units of X 12 to be purchased from market ( Total Requirement-1750)
(8000-1750)
6250 Units
c)
Relevant cost is the cost which can be completely eliminated if Production is not done.In other words Relevent cost change according to change in production units.
Irrelevant cost such as Fixed cost or Unavoidable cost will be excluded when decision is taken whether to produce or buy from market.
Expenses of Relevant cost are Variable Direct Material,variable Direct Labour, Variable production Overheads,Variable selling overheads,etc.
Take the example given above .In calculating Total Cost Fixed cost is not included because it will be same even if production is zero..
a)
Total Machine Hours
31000 Hours
Hours Consumed in Production of X12
Item
Units
Labour Hours per Unit
Total Labour Hour
X12
8000
2
16000
Hours Left for Production of Y 18 (31000 Hours-16000 Hours)
15000 Hours
Maximum Y 18 Units that can be produced in 15000 Machine Hours (15000 hours/2.5)
6000 Units
Units of Y18 to be purchased from market ( Total Requirement-6000)
(11000-6000)
5000 Units
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