Chenango Industries uses 12 units of part JR63 each month in the production of r
ID: 2594150 • Letter: C
Question
Chenango Industries uses 12 units of part JR63 each month in the production of radar equipment. The cost of manufacturing one unit of JR63 is the following:
Material handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Chenango Industries’ annual manufacturing overhead budget is one-third variable and two-thirds fixed. Scott Supply, one of Chenango Industries’ reliable vendors, has offered to supply part number JR63 at a unit price of $48,000.
Required:
If Chenango Industries purchases the JR63 units from Scott, the capacity Chenango Industries used to manufacture these parts would be idle. Should Chenango Industries decide to purchase the parts from Scott, the unit cost of JR63 would increase (or decrease) by what amount?
Assume Chenango Industries is able to rent out all its idle capacity for $78,000 per month. If Chenango Industries decides to purchase the 12 units from Scott Supply, Chenango’s monthly cost for JR63 would increase (or decrease) by what amount?
Assume that Chenango Industries does not wish to commit to a rental agreement but could use its idle capacity to manufacture another product that would contribute $162,000 per month. If Chenango’s management elects to manufacture JR63 in order to maintain quality control, what is the net amount of Chenango’s cost from using the space to manufacture part JR63?
Direct material $ 3,000 Material handling (20% of direct-material cost) 600 Direct labor 28,000 Manufacturing overhead (150% of direct labor) 42,000 Total manufacturing cost $ 73,600Explanation / Answer
Solution:
Total variable cost per unit of JR 63 = $3,000 + $600 + $28,000 + ($42000*1/3) = $45,600
Fixed Cost per unit of JR 63 = $42000*2/3 = $28000
Monthly Fixed Cost = $28,000*12 = $336,000
1. If Chennago industries purhcase JR 63 from Scott and capacity used to manufacture these parts would be idle in that fixed cost cannot be avoided and we can save variable cost of manufacturing i.e. $45,600 per unit
Therefore unit cost of JR63 will increase by = $48,000 - $45,600 = $2,400
2. If Chenango industries is able ot rent out all its capacity for $78,000 per month and purchase 12 units of JR 63 from Scott supply then net increase/(decrease) in cost = $2400*12 - $78,000 = ($49,200)
Therefore cost of JR 63 will decrease by $49,200.
3. If idle capacity can be used to manufacture another product that would contribute $162,000 per month and Chennago management elects to manufacture JR 63 in order to maintain quality control then it will loose contributio of $162,000. The opportunity cost to manufacture JR 63 will be $162,000. Therefore Total amount Chennago's cost to manufacture part J63 will be
= $45,600*12 + $336,000 + $162,000 = $1,045,200
Total cost if purchased from Scott = $48000*12 + $336,000 = $912,000
Net amount of addtional cost from using the space to manufacture JR 63 = $1,045,200 - $912,000 = $133,200
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.