1 Week 10 – Practices Question 10 1 Illustration Precision Sporting Goods, a manufacturer of golf clubs Should it reorganize its manufacturing operations to reduce manufacturing labor costs? Precision[.]
Week 10 – Practices Question 10.1 Illustration Precision Sporting Goods, a manufacturer of golf clubs: Should it reorganize its manufacturing operations to reduce manufacturing labor costs? Precision Sporting Goods has only two alternatives: Do not reorganize or reorganize Reorganization will eliminate all manual handling of materials Current manufacturing labor consists of 20 workers—15 workers operate machines, and workers handle materials The materials-handling workers have been hired on contracts that permit layoffs without additional payments Each worker works 2,000 hours annually Historical hourly wage rates are $14 per hour However, a recently negotiated increase in employee benefits of $2 per hour will increase wages to $16 per hour (The reorganization of manufacturing operations is expected to reduce the number of workers from 20 to 15 by eliminating all workers who handle materials The reorganization is likely to have negative effects on employee morale) Reorganization is predicted to cost $90,000 each year (mostly for new equipment leases) Production output of 25,000 units as well as the selling price of $250, the direct material cost per unit of $50, manufacturing overhead of $750,000, and marketing costs of $2,000,000 will be unaffected by the reorganization Question 10.2 Determine relevant costs For a job, following information is available regarding Labour cost Skilled labour is currently paid at £25 per hour To complete the job they will require 260 skilled hours Skilled labour is in short supply and only 200 hours are available The other 60 hours will be released from not undertaking some repair work that would have generated £5,000 contribution 80 hours of semi-skilled labour is required and they are currently paid £20 per hour They are currently under-employed and if not engaged on this task they would be temporarily laid off and paid 60% of their normal wage rate What is the total relevant cost of Labour? A job requires following estimates for labour costs Labour costs: Skilled 1000 hours x £25 £25,000 Construction 5,000 hours x £20 £100,000 Supervision 600 hours x £30 £18,000 Skilled workers are currently in short supply If this contract is undertaken some of this current work would have to be cancelled, and they estimate that this would result in a lost contribution of £20,000 Construction hours: It is estimated that 50% of the construction hours (2500 hours) can be provided internally but the remaining 50% of the construction hours would need to be outsourced from an employment agency The cost of outsourcing is £30 per hour Supervision hours: Supervision staff are currently underutilized and if not employed on this contract they would be laid off and paid 60% of their normal £30 per hour rate Calculate the total relevant cost for Labour Question 10.3 make or buy decision Han Products manufactures 30,000 units of part S-6 each year for use on its production line At this level of activity, the cost per unit for part S-6 is as follows: Direct materials $3.60 Direct labor $10.00 Variable manufacturing overhead $2.40 Fixed manufacturing overhead $9.00 Total cost per part $25.00 An outside supplier has offered to sell 30,000 units of part S-6 each year to Han Products for $21 per part If Han Products accepts this offer, the facilities now being used to manufacture part S-6 could be rented to another company at an annual rental of $80,000 However, Han Products has determined that two-thirds of the fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier Required: Should the company buy part S-6 from outside supplier or continue to make inside? How much profits will increase or decrease if the outside supplier’s offer is accepted Question 10.4 accept or reject a special order Delta Company produces a single product The cost of producing and selling a single unit of this product at the company’s normal activity level of 60,000 units per year is: Direct materials $5.10 Direct labor $3.80 Variable manufacturing overhead $1.00 Fixed manufacturing overhead $4.20 Variable selling and administrative expense $1.50 Fixed selling and administrative expense $2.40 The normal selling price is $21 per unit The company’s capacity is 75,000 units per year An order has been received from a mail-order house for 15,000 units at a special price of $14.00 per unit This order would not affect regular sales Required: Can the company accept this order? If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company’s total fixed costs.) Assume the company has 1,000 units of this product left over from last year that are inferior to the current model The units must be sold through regular channels at reduced prices What unit cost is relevant for establishing a minimum selling price for these units? Explain Question 10.5 Prepare profit report using relevant information Hutton Plc is considering whether to accept the offer of a contract to undertake some reconstruction work at a price of £73,000 The work would begin almost immediately and will take about a year to complete The company’s accountant has submitted the following statement £ £ Contract price 73,000 Less costs Pre-production survey, contract assessment Materials A B Labour Direct Indirect Machinery Depreciation on machines owned Hire of special equipment General overheads Total cost Expected profit 4,700 7,000 8,000 15,000 21,000 12,000 33,000 4,000 5,000 9,000 10,500 72,200 800 The management of the company is rather apprehensive as to whether it is advisable to incur the inevitable risks involved for such a small profit margin On making further enquiries the following information becomes available £4,700 was the cost of field investigation and costs of activities related to the preparation of the contract that had already been paid Material A was bought two years ago for £7,000 It would cost £8,000 at today’s prices If not used on this contract, it could be sold for £6500 There is no alternative use for this material Material B was ordered for another job but will be used on this job if the contract is accepted The replacement for the other job will cost £9,000 The trade union has negotiated a minimum wage agreement, as a result of which direct wages of £21,000 will be incurred whether the contract is undertaken or not If not employed on this contract, it is thought that these employees could be used to much needed maintenance work, which would otherwise be done by an outside contractor at an estimated cost of £18,500 The indirect labour is the wage of a foreman who will have to be taken on to supervise the contract A suitable person is ready to take up the appointment at once The machine which is already owned is six years old £4,000 is the final instalment of depreciation required to write off the balance on the asset account There is no alternative use for the machine, and its scrap value is negligible, because of the high cost of dismantling and removal The general overhead absorption rate is 50% of direct labour Overheads are expected to rise by £4,000 if the contract is accepted The CEO after looking at this additional information requires you as his assistant, draw up an amended report of costs and projected profit for this contract Explain your workings