Linda Wheeler has worked as the plant manager of Vicksburg Corporation, a large

Question

Linda Wheeler has worked as the plant manager of Vicksburg Corporation, a large manufacturing company, for 10 years. The company produces stereo DVD players for automotive vehicles and sells them to some of the largest car manufacturers in the country. Ms. Wheeler has always toyed with the idea of starting her own car stereo manufacturing business. With her experience and knowledge, she is certain that she can produce a superior stereo at a low cost. Ms. Wheeler’s business strategy would be to market the product to smaller, more specialized car manufacturers. Her potential market is car manufacturers who sell at a lower volume to discriminating customers. She is confident that she could compete in this market that values low-cost quality production. She would not compete with Vicksburg or the other large stereo producers that dominate the market made up of the largest automotive producers. Ms. Wheeler already has firm orders for 800 stereos from several automotive producers. Based on the contacts that she has made working for Vicksburg, Ms. Wheeler is confident that she can make and sell 2,000 stereos during the first year of operation. However, before making a final decision, she decides to investigate the profitability of starting her own business. Relevant information follows: Components from suppliers $52.00 per stereo Assembly labor $20.00 per hour Rent of manufacturing buildings $14,000.00 per year Utilities $480.00 per month Sales salaries $960.00 per month Depreciation of equipment $3,200.00 per year Labor 3 hours per stereo During the first year, Ms. Wheeler expects to be able to produce the stereos with only two production workers and a part-time salesperson to market the product. Ms. Wheeler expects to devote her time to the administrative aspects of the business and to provide back-up support in the production work. She has decided not to pay herself a salary but to live off the profits of the business. Required a. Classify each cost item into the categories of direct materials, direct labor, and manufacturing overhead. b. Classify each cost item as either variable or fixed. c. What is the cost per stereo if Ms. Wheeler’s company produces 800 units per year? What is the unit cost if the company produces 2,000 units per year? d. If Ms. Wheeler’s job presently pays her $24,000 a year, would you recommend that she proceed with the plans to start the new company if she could sell stereos for $184 each?

Explanation / Answer

(a) Classify each cost item into the categories of direct materials, direct labor, and manufacturing overhead item Category Components from Suppliers Direct materials labour cost Direct Labour Rent of manufacturing Building manufactruring over head Utilitis manufactruring over head Sales Salaries Administartive overhead depreciation manufactruring over head (b) Classify each cost item as either variable or fixed item Classification Components from Suppliers Variable cost labour cost Variable cost Rent of manufacturing Building Fixed cost Utilitis Fixed cost Sales Salaries Fixed cost depreciation Fixed cost © What is the cost per stereo if Ms. Wheeler’s company produces 800 units per year? What is the unit cost if the company produces 2,000 units per year? Compution of unit cost if the production is 800 if the production is 2000 Components from Suppliers 52.00 52.00 labour cost $20*3 60.00 60.00 Total variable cost 112.00 112.00 Rent of manufacturing Building $14000/800 17.50 $14000/2000 7.00 Utilitis $480*12/800 7.20 $480*12/2000 2.88 Sales Salaries $960*12/800 14.40 $960*12/2000 5.76 depreciation $3200/800 4.00 $3200/2000 1.60 Total Fixed cost per unit 43.1 17.24 Total Cost of Slaes per unit 155.1 129.24 (d) If Ms. Wheeler’s job presently pays her $24,000 a year, would you recommend that she proceed with the plans to start the new company if she could sell stereos for $184 each? Income earned by wheeler by selling Stereos @184 (2000 Units) =2000 * ($184-$129.24) =$109,520 It exceds the yearly income earned by Wheeler, so The project is recommended

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