Question

Q1. Decorative Doors is a company that manufactures large quantities of wooden doors. Currently, they manufacture door knobs to be sold with their doors. A specialized door knob manufacturer has offered to sell them door knobs for a cost of $10 per knob. Their current relevant manufacturing costs for a batch 1,200 door knobs are as follows: Direct Materials: $5,000 , Direct Labour: $4,000 , Factory Overhead: $2,000 .

A)What is the per door knob cost of manufacturing? (round to the nearest cent, no dollar sign)

B)Should Decorative Doors make or buy door knobs?
a.make
b.buy

Q2. Casualwear Co. manufactures mens shirts. They currently produce their own buttons to be used on their shirts. Buttons R Us offers to sell them buttons for $1.75 per button. Casualwear's total manufacturing costs for a batch of 1,500 buttons is as follows: Direct Materials: $900 , Direct Labour: $750 , Factory Overhead: $400. If Casualwear was to buy their buttons, they could either use their plant for other manufacturing, and increase their profit by $3,000, or they could rent it out for $2,500.

A)What is total cost of manufacturing a batch of buttons? (round to nearest dollar, no dollar sign)

B)Which option should Casualwear choose?
a.make buttons
b.buy buttons and leave facility idle
c.buy buttons and increase production
d.buy buttons and rent out facility space

Q3. Songo Inc. manufactures MP3 players. After a slow sales year, they are left with 500 outdated MP3 players. The original production cost of the players was $5,000. Songo has the choice of updating these players for a cost of $2,000 and then selling them for $7,500, or scrapping them for proceeds of $3,500.

A)What would be the net result of reworking the MP3 players? (round to nearest dollar, no dollar sign)

B)What should Songo do with the outdated MP3 players?
a.rework
b.scrap

Answer 1

Question-1)

Solution:

(a) Per door knob cost of manufacturing is calculated as;

Per door knob cost of manufacturing = Total cost of manufacturing / Batch size

Per door knob cost of manufacturing = ($5000 + $4000 + $2000) / 1200

Per door knob cost of manufacturing = $11000 / 1200

Per door knob cost of manufacturing = $9.17

(b) Since, the cost of manufacturing the door knobs is $9.17 per knob while the cost of buying it from a specialized manufacturer is $10 per knob, the decorative doors should make the door knobs.

Answer: Option (A) - Make

Question-2)

Solution:

(a) The total cost of manufacturing a batch of buttons (Batch size = 1500) is calculated as;

Total cost = Direct Materials + Direct Labour + Factory Overhead

Total cost = $900 + $750 + $400

Total cost = $2,050

The total cost of manufacturing a batch of buttons = $2,050

(b) Per button cost when manufactured is calculated as;

Per button cost = Total cost of manufacturing / Batch size

Per button cost = $2050 / 1500

Per button cost when manufactured = $1.37 per button

Per button cost when purchased from other manufacturer = $1.75 per button

When the company buy their buttons from other manufacturer, they have to pay additional cost per button of $0.38 ($1.75 - $1.37). That is, $570 for a batch size of 1500 buttons. However, they could use their plant for other manufacturing and increase their profit by $3,000.

Net profit = $3000 - $570

Net profit = $2430

Therefore, Casual wear should buy buttons and increase production.

Answer: Option (C) - buy buttons and increase production

Question-3)

Solution:

(a) Original production cost = $5000

Updating cost = $2000

Selling price = $7500

The net result of reworking the MP3 players is calculated as;

Profit = Total Revenue - Total Costs

Profit = ($7500) - ($5000 + $2000)

Profit = $500

The net result of reworking the MP3 players is a profit of $500

(b) Reworking the MP3 players will result in a profit of $500 for Songo, while scrapping the MP3 players will result in a loss of $1500 ($5000 - $3500).

Therefore, Songo should rework the outdated MP3 players.

Answer: Option (A) - Rework