Question

In: Accounting

Cost Behavior, Resource Usage, Excess Capacity Rolertyme Company manufactures roller skates. With the exception of the...

Cost Behavior, Resource Usage, Excess Capacity

Rolertyme Company manufactures roller skates. With the exception of the rollers, all parts of the skates are produced internally. Neeta Booth, president of Rolertyme, has decided to make the rollers instead of buying them from external suppliers. The company needs 100,000 sets per year (currently it pays $1.90 per set of rollers).

The rollers can be produced using an available area within the plant. However, equipment for production of the rollers would need to be leased ($30,000 per year lease payment). Additionally, it would cost $0.50 per machine hour for power, oil, and other operating expenses. The equipment will provide 60,000 machine hours per year. Direct material costs will average $0.75 per set, and direct labor will average $0.25 per set. Since only one type of roller would be produced, no additional demands would be made on the setup activity. Other overhead activities (besides machining and setups), however, would be affected. The company’s cost management system provides the following information about the current status of the overhead activities that would be affected. (The supply and demand figures do not include the effect of roller production on these activities.) The lumpy quantity indicates how much capacity must be purchased should any expansion of activity supply be needed. The purchase price is the cost of acquiring the capacity represented by the lumpy quantity. This price also represents the cost of current spending on existing activity supply (for each block of activity).

Activity Price Cost Driver Supply Usage Lumpy
Quantity
Purchase
Purchasing Orders 25,000 23,000 5,000 $25,000
Inspection Hours 10,000 9,000 2,000 30,000
Materials handling Moves 4,500 4,300 500 15,000

Production of rollers would place the following demands on the overhead activities:

Activity Resource Demands
Machining 50,000 machine hours
Purchasing 2,000 purchase orders (associated with raw materials used to make the rollers)
Inspection 750 inspection hours
Materials handling 500 moves

Producing the rollers also means that the purchase of outside rollers will cease. Thus, purchase orders associated with the outside acquisition of rollers will drop by 5,000. Similarly, the moves for the handling of incoming orders will decrease by 200. The company has not inspected the rollers purchased from outside suppliers.

Required:

1. Using the questions below, classify all resources associated with the production of rollers as flexible resources and committed resources and as a short- or long-term commitment.

a. Direct materials, direct labor and machine operating costs would be classified as:

flexible resources

b. Machining would be classified as:

long-term committed resources

c. Purchasing, inspection and materials handling would be classified as:

short-term committed resources

2. Calculate the total annual resource spending (for all activities except for setups) that the company will incur after production of the rollers begins. Break this cost into fixed and variable activity costs. In calculating these figures, assume that the company will spend no more than necessary.

Fixed Cost $
Variable Cost $
Total Cost $

What is the effect on resource spending caused by production of the rollers?

Decrease   = $

3. Refer to Requirement 2. For each activity, break down the cost of activity supplied into the cost of activity output and the cost of unused activity.

Activity Cost of Activity Supplied Cost of Activity Used Cost of Unused Activity
Machining $ $ $
Purchasing
Inspection
Materials handling

Solutions

Expert Solution

Fixed Costs $430,000
Variable Costs $125,000
Total Cost $555,000

Notes to Above Costs :

100,000 set per set
Activity Variable Cost Fixed Cost Total Cost
Material Usage $75,000 $75,000 $ 0.75
Labor Usage $25,000 $25,000 $ 0.25
Machining $25,000 * $30,000 $55,000
Purchasing $100,000 $100,000
Inspection $150,000 $150,000
Material Handling $150,000 $150,000
Total Activity Cost $125,000 $430,000 $555,000
Annual Lease payment of Machine = $30,000. Its is Fixed
*Variable Machine Overhed= 50,000 × $ 0.50 per hour = $25,000- Variable
Required demand = Usage - Lumsum order Quantity + 2,000 units
                                      = 23,000 units - 5,000 unit +2,000 = 20,000
Since Material asr purchase in lots of 5,000 units, 2,000 more units
are purchased. There will be 4 orders of 5,000 units.
The Cost of of each bloack of resources is $25,000 and there are 4
order to tobe made. Thus, the annual purchasing cost will be $100,000.
Inspection:
Inspection Demand Hour= 9,000 hours + 750 hours = 9,750 hors
As the resource are purchased in blocks of 2,000 hours, the supply
must be equal to 10,000 hours. The required blocks is 5 and each block
of suplly is availbe in $30,000. Thus,
Annual Inspection cost = 5 × $30,000 =$150,000
Material Handling
MH Demand = 4,300 + 500 -200 = 4,600; since material are moved in lots of 500,in 10 moves material supplied is 5,000 units that is 200 units
more than the requirement. So, 10 moves will be made.Resource. Resource Resource Spending in Material Handling = 10 moves × $15,000 = $150,000
Effects of Resouce Spending if Rollers are Produced
Materials -75,000
Labors -25,000
Machining -55,000
Purchasing (saving) 25,000
Inspection (No effect) 0
Material Handling -15,000
Outside Purchase (1.90 × 100,000) Saving 1,90,000
                      Total Saving if Produced $45,000

Notes:

Supply decreases from 30,000 units to 25,000 units saving $25,000.
Activity remains at 10,000 hours instead of 9,750 hours, so no saving
Material Handling Actvity increases by 500 moves and thus, spending
cost increases by $15,000.
Resource or cash spending for outside purchase is saved by $190,000.
Cost of Cost of Cost of
Activity Activity Supplied Activity Used Unused Activity
Machining $30,000 $25,000 $5,000
Purchasing $100,000 $100,000 0
Inspection $150,000 $146,250 $3,750
Material Handling $150,000 $138,000 $12,000

Notes to the above table

Cost of unused Capacity
Machining= $30,0000 ÷ 60,000 hours × 10,000 hours = $5,000
Puchasing = ($100,000 ÷ 20,000) × 0 = 0
Inspection = ($1500,000 ÷ 10,000) × 250 = $3,750
Material Handling = ($150,000 ÷ 5,000) × 400 = $12,000

Related Solutions

Cost Behavior, Resource Usage, Excess Capacity Rolertyme Company manufactures roller skates. With the exception of the...
Cost Behavior, Resource Usage, Excess Capacity Rolertyme Company manufactures roller skates. With the exception of the rollers, all parts of the skates are produced internally. Neeta Booth, president of Rolertyme, has decided to make the rollers instead of buying them from external suppliers. The company needs 100,000 sets per year (currently it pays $1.90 per set of rollers). The rollers can be produced using an available area within the plant. However, equipment for production of the rollers would need to...
Cost Behavior, Resource Usage, Excess Capacity Rolertyme Company manufactures roller skates. With the exception of the...
Cost Behavior, Resource Usage, Excess Capacity Rolertyme Company manufactures roller skates. With the exception of the rollers, all parts of the skates are produced internally. Neeta Booth, president of Rolertyme, has decided to make the rollers instead of buying them from external suppliers. The company needs 100,000 sets per year (currently it pays $1.90 per set of rollers). The rollers can be produced using an available area within the plant. However, equipment for production of the rollers would need to...
The Harding Company manufactures skates. The company’s income statement for 20X1 is as follows: HARDING COMPANY...
The Harding Company manufactures skates. The company’s income statement for 20X1 is as follows: HARDING COMPANY Income Statement For the Year Ended December 31, 20X1 Sales (11,100 skates @ $72 each) $ 799,200 Variable costs (11,100 skates at $31) 344,100 Fixed costs 260,000 Earnings before interest and taxes (EBIT) $ 195,100 Interest expense 65,500 Earnings before taxes (EBT) $ 129,600 Income tax expense (30%) 38,880 Earnings after taxes (EAT) $ 90,720 a. Compute the degree of operating leverage. (Round your...
When a company has a limited resource, it should apply additional capacity of that resource to...
When a company has a limited resource, it should apply additional capacity of that resource to providing more units of the product or service that has the: Select one: a. highest contribution margin per unit of that limited resource. b. highest gross profit. c. highest contribution margin. d. highest selling price. XYZ Company manufactures ultra sound equipment. Based on past experience, XYZ has found that total annual repair and maintenance cost can be represented by the following formula: total annual...
Inline Incorporated manufactures skates and equipment for in-line skating. The company offers a one-year warranty on...
Inline Incorporated manufactures skates and equipment for in-line skating. The company offers a one-year warranty on all products. During 2014, the company recorded net sales of $4,127.8 million. Historically, about 3% of all sales are returned under warranty and the cost of repairing and or replacing goods under warranty is about 50% of retail value. Assume that at the start of the year Inline’s balance sheet included an accrued warranty liability of $15.4 million and at the end of the...
Company ABC produces toys for many shops. Due to its excess capacity, the company tries to...
Company ABC produces toys for many shops. Due to its excess capacity, the company tries to start a new product line to manufacture a new toy car model. The company has gathered the following information on the product line from which the company can make 1,000 toy cars. For each toy car, the direct materials cost $60, direct labor costs $40, and total manufacturing overhead costs $20. Due to the excess capacity, producing the new toy car has no impact...
A company with excess capacity must decide between scrapping or reworking units that do not pass...
A company with excess capacity must decide between scrapping or reworking units that do not pass inspection. The company has 13,000 defective units that cost $5.20 per unit to manufacture. The units can be a) sold as is for $2.80 each, or b) reworked for $5.00 each and then sold for the full price of $8.00 each. What is the incremental income from selling the units as scrap and reworking and selling the units? Should the company sell the units...
Transfer Prices at Full Cost with Excess Capacity: Divisional Viewpoint Karakomi Cameras Inc. has a Disposables...
Transfer Prices at Full Cost with Excess Capacity: Divisional Viewpoint Karakomi Cameras Inc. has a Disposables Division that produces a camera that sells for $14.00 per unit in the open market. The cost of the product is $11.30 (variable manufacturing of $5.00, plus fixed manufacturing of $6.30). Total fixed manufacturing costs are $441,000 at the normal annual production volume of 70,000 units. The Overseas Division has offered to buy 20,000 units at the full cost of $11.30. The Disposables Division...
E5-2 Determining Cost Behavior and Calculating Expected Cost [LO 5-1] Morning Dove Company manufactures one model...
E5-2 Determining Cost Behavior and Calculating Expected Cost [LO 5-1] Morning Dove Company manufactures one model of birdbath, which is very popular. Morning Dove sells all units it produces each month. The relevant range is 0–1,700 units, and monthly production costs for the production of 1,200 units follow. Morning Dove’s utilities and maintenance costs are mixed with the fixed components shown in parentheses.    Production Costs Total Cost Direct materials $ 1,900 Direct labor 7,300 Utilities ($130 fixed) 550 Supervisor’s salary...
QUESTION 7 an organization toys for many shops. Due to its excess capacity, the company tries...
QUESTION 7 an organization toys for many shops. Due to its excess capacity, the company tries to start a new product line to manufacture a new toy car model. The company has gathered the following information on the product line from which the company can make 1,000 toy cars. For each toy car, the direct materials cost $60, direct labor costs $40, and total manufacturing overhead costs $20. Due to the excess capacity, producing the new toy car has no...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT