please help me to solve this problem!!! thank you in advance:)) Stan Holbert, th

Question

please help me to solve this problem!!!

thank you in advance:))

Stan Holbert, the purchasing manager for Champion Industries, recently attended a meeting with a potential supplier, Wallace Materials. At the meeting, a Wallace manager demonstrated a material that was easier to handle and shape than the material currently used by champion Industries. Assume that annual production is 150,000 units. Calculate the cost savings associated with using the new material. b. Stan knows that because of an overworked accounting department, standard costs will not be updated in a timely manner. Suppose that the company switches to the new material. What are the expected material and labor variances if standards are not updated? c. Suppose purchase price variances play a prominent role in the evaluation of Stan's job performance. Will he be inclined to suggest use of the new material?

Explanation / Answer

ANSWER A:

1) Savings in Material Costs = [ ( $23 * 10 lbs) - ( $25 * 8 lbs) ] * 150000 units = $ 4500000

2) Savings in Labour Costs = [ ( $ 30 * 2.5hours ) - ( $ 30 * 0.75hour) ] * 150000 units = $ 7875000

Therefore, Total Savings = $ 4500000 + 7875000 = $ 12375000

ANSWER B:

To calculate variances, we should be given the Actual Quantity purchased. I have assumed it to be 120000 units and accordingly the material variances have been calculated. Had it been calculated using 150000 units itself, material variance could not have been calculated.

Direct material Quantity Variance = [ Standard Quantity - Actual Quantity] * Standard Price

Direct material Quantity Variance = [ 150000 - 120000] *23 = $ 690000

Direct Material Price Variance = [ Standard Price - Actual Price ] * Actual Quantity

Direct Material Price Variance = [ 23 - 25 ] * 120000 = $ 240000 U

Direct Labour Rate Variance = [ Standard Rate - Actual Rate ] * Actual Hour

Direct Labour Rate Variance = [ 30 - 30 ] * (150000 * 0.75) = 0

Direct Labour Efficiency Variance = [ standard hour - actual hour] * standard rate

Direct Labour Efficiency Variance = [ 2.5*150000 - 0.75*150000] * 30 = $ 7875000F

ANSWER C:

As seen from above variances there will be an unfavorable price variance till the time standards are updated. Hence its unlikely to use of the new material, even though total cost savings associated with the new material is huge.

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