ACC 1003 Week 3 Assignment 2
Make or buy, relevant costs, opportunity cost. Kentucky Motors has manufactured compressor parts at its plant in Pitcairn, Indiana , for the past 18 years . An outside suppliers, Superior Compressor Company, has offered to supply compressor model A238 are as follows:
Direct materials $80
Direct labor 60
Unit-related support 26
Batch-related support 22
Product-sustaining support 8
Facility-sustaining support 17
Total costs $213
a. Should Superior Compressor's offer be accepted if the plant is presently operating below capacity?
b. What is the maximum acceptable purchase price if the plant facilities are fully utilized a present and and if any additional available capacity can be deployed for the production of other compressor?
Bogden Company introduced JIT manufacturing last year and has prepared the following data to assess the benefits from the change.
Category Before the Change After the Change
Production cycle time 68 days 30 days
Inventories &nbs p; $160,00 $40,000
Total sales & nbsp; $1,260,000 $1,700,000
Cost as percent of sales:
Direct materials &nbs p; 30% 20%
Direct Labor &n bsp; 22% 15%
Variable support 28% 10%
Fixed support 12%&nb sp; 5%
Inventory financing cost are 15% per year. Estimate the total financial benefits that resulted from the switch to JIT manufacturing operations.
Make or buy Tanner Appliance Company manufacturers 12,000 units of part M-4 annually. The part is used in the production of one of its prinicpal products. The following unit cost information is available on part M4:
Direct material $11
Direct Labor 9
Unit-related support 4
Batch-related support 5
Facility-sustaining support 2
Allocated corporate support 5
Total costs $38
A potential supplier has offered to manufacture this part for Tanner Appliance for $30 per unit. If Tanner Appliance outsources the production of part M4, 50% of batch related and 80% of product-sustaining activity resources can be eliminated. Furthermore, the production facility now being used to produce this part can be used for a fast-growing new product line that would otherwise require the use of a neighboring facility at a rental cost of $20,000 per year.
a. Should Tanner Appliance purchase part M4 from the outside supplier?
b. What costs are relevant for the decision?
c. What additional factors should Tanner consider?
ABC and TOC Discuss the similarities and difference between activity-based costing and the theory of constraints as well as situations in which one approach might be preferable to the other.
Cycle time efficiency and JIT Walker Brother Company is considering installing a JIT manufacturing system in the hope that it will improve its over all processing cycle efficiency. Data from the traditional system and estimates for the JIT system are presented here for their Nosun Product.
Time Category Traditional System JIT System
Storage&nb sp; 4hours 1 hours
Inspection 40 minutes 5 minutes
Moving 80 minutes 20 minutes
Processing 2 hours 75 minutes
a. Calculator processing cycle efficiency (PCE) under the traditional and JIT systems for the Nosun Product.
b. Strictly based on your PCE calculation above, should Walker Brothers implement the JIT system? Explain.
Relevant costs: dropping a product Merchant Company manufacturers and sells three models of electronic printers. Ken Gail, president of the company, is considering dropping model JT484 from its product line because the company has experienced losses for this product over the past three quarters. The following product-level operating data have been compiled for the most recent quarters:
Category &nb sp; Total JT284 JT384 JT484
Sales $1,000,000   ; $500,000 $200,000 $300,000
Variable costs 600,000 &nb sp; 300,000 100,000 200,000
Contribution margin $400,000 $200,000 $100,000 $100,000
Rent $50,000   ; $25,000 $10,000 $15,000
Depreciation &nbs p; 60,000 30,000 12,000 18,000
Utilities &n bsp; 40,000 20,000 5,000 15,000
Supervision 50,000 15,000 5,000 30,000
Maintenance 30,000 & nbsp; 15,000 6,000 9,000
Administrative   ; 100,000 30,000 20,000 50,000
Total Fixed costs &nbs p; $330,000 $135,000 $58,000 $137,000
Operating income (loss) $70,000 $65,000 $42,000 ($37,000)
In addition, the following information is also available:
Factory rent and depreciation will not be affected by a decision to drop model JT484.
Quarterly utility bills will be reduced from $40,000 to $31,000 if JT484 is dropped.
Supervision costs for JT484 can be eliminated if dropped.
The maintenance department will be able to reduce quarterly costs by $7,000 if JT484 is dropped.
Elimination of JT484 will make it possible to eliminated two administrative staff positions with combined salaries of $30,000 per quarter.
a. Should Merchant Company eliminate JT484.
b. Merchant's sales manager believes that it is important to continue to produce JT484 to maintain a full product line. He expects the elimination of JT484 will reduce sales of the remaining two products by 5% each. Will this information change your answer to (a). Explain.
Quality improvement programs and cost saving. Garber Valves Company manufactures brass valves meeting precise specification standards. All finished valves are inspected before packing and shipping to customers. Rejected valves are returned to the initals production stage to be melted and recast. Such rework requires no new materials in casting but requires new materials in finishings. The following unit cost data are available:
Costs Casting Finishing Inspection Packing Total
Direct Material &nbs p; $225 $12 $0 $ 8 $245
Direct labor 84 121  ; 24 16 245
Variable support 122 164 &n bsp; 30 20 336
Fixed support & nbsp; 63 89 16 10 178
$494 $386 $70 $54 $1004
As a result of a quailty-improvement program, the reject rate has decreased from 6.4% to 5.1% and the number of rejects has decreased by (6.4% - 5.1%) x (10,000) units. Improvements I reject rates have also led to a decrease in work in process inventory from $386,000 to $270,000. Inventory carrying costs are estimated to be 15% per year. Estimated the annual cost savings as a result of the quality improvement.
Facilities layout. One aspect of facilities layout for McDonald's is that when customers come into the building , they can line up in one of several lines and wait to be served. In contrast, customer's at Wendy's are asked to stand in one line that snakes around the front of the counter and to wait for a single server.
a. What is the rationale for each approach ?
b. Which approach do you favor from (1) a customer's perspective and (2) management's perspective? Explain.
Preparing a cost of quality report. The following information shows last year's quality-related costs for the Renewal Company:
Item &n bsp; Amount
Quality engineering $500,000
Warranty claims&nbs p; 2,345,000
Product liability lawsuits 4,500,000
Research of customer needs 75,000
Maintenance of test equipment 350,000
Returned products &n bsp; 1,200,000
Rework costs&nbs p; 1,200,000
Quality training   ; 125,000
Process control monitoring 1,000,000
Inspection of and testing of incoming materials 400,000
Repair costs in the field 850,000
Statistical process control 250,000
Product recalls & nbsp; 2,000,000
Waste & nbsp; 700,000
Net cost of scrap 635,000
Product quality 475,000
Downtime due to defects 125,000
Supplier certification 90,000
Total sales for the year were $100,000,000
a. Prepare a cost of quality report grouping costs into prevention, appraisal, internal failure, and external failure. Also show costs as a percent of sales.
b. Interpret the data and make recommendations to Renwal's management.