The correct answer for this problem is $47,040 Question 5: AJ Company produces 3

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The correct answer for this problem is $47,040

Question 5: AJ Company produces 30,000 baskets per year. The company estimates costs per unit below: $20 Direct material costs Conversion costs $18 $10 Direct labor Support Annual inventory carrying costs are not included in the above costs. The annual estimate is 12%. AJ's average inventory levels are estimated as follows Direct material WIP (80% complete for materials & 30% for conversion) Finished goods 3 months of production 2 months of production 1 month of production Compute the annual inventory carrying costs for AJ Company

Explanation / Answer

Annual Carrying cost is cost of holding inventory or goods in stock to fulfil the orders of the company.

Calculation of total Cost of Production

Direct Material:

Materials (30000*20*3/12) 150000

Work In Progress:

Materials (30000*20*2/12*80/100) 80000

labor (30000*18*2/12*30/100) 27000

Support (30000*10*2/12*30/100) 15000

Finished Goods:

(30000*48*1/12) 120000

Total Cost of production= 392000

Annual Estimate of Annual Carrying Cost is 12% of total Cost of production.

So Annual Carrying Cost= 392000*12/100= $47040.

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