Question

Fowler Co. produces two bearings: C15 and C19. Data regarding these bearings follow:

		C15	C19
Machine hours required per unit		2.00	2.50
Standard cost per unit:
Direct material		$ 2.50	$ 4.00
Direct labor		5.00	4.00
Variable overhead*		3.00	2.50
Fixed overhead**		4.00	5.00
Total		$14.50	$15.50
*Applied on the basis of direct labor hours
**Applied on the basis of machine hours

         

The company requires 8,000 units of C15 and 11,000 units of C19. Recently, management decided to devote additional machine time to other product lines, resulting in only 31,000 machine hours per year that can be dedicated to production of the bearings. An outside company has offered to sell Fowler the bearings at prices of $13.50 for C15 and $13.50 for C19.

      

REQUIRED:

a. Assume that Fowler decided to produce all C15s and purchase C19s only asneeded. Determine the number of C19s to be purchased.

b. Compute the net benefit to the firm of manufacturing (rather than purchasing) a unit of C15. Repeat the calculation for a unit of C19.

c. Which component(s) (C15 and/or C19) should Fowler manufacture with the limited machine hours available? Why?

Answer 1

a. Assume that Fowler decided to produce all C15s and purchase C19s only asneeded. Determine the number of C19s to be purchased.

Answer:

No. of C19s to be purchased = 5,000

Calculation:

To calculate the number of C19s purchased, we need to deduct the Units to be manufactured from the Annual requirement.

Annual requirement is provided in the question, which is 11,000.

So, we need to calculate the Units to be manufactured for C19. From tha machine hours available C19, we need to deduct the machine hours for C15 from Machine hours available.

The machine hours of C15 = Machine hours required per unit * Units required = 8,000 * 2 = 16,000

After finding the Machine hours available for C19, we need to divide it with the Machine hours required per unit C19.

The calculation is done below:

Machine hours available	31,000
Less: Machine hours for C15	16,000
Machine hours available for C19	15,000
Machine hours per unit of C19	2.50
Units to be manufactured	6,000

Then, we need to deduct the Units to be manufactured from the Annual requirement.

Annual requirement	11,000
Less: Units to be manufactured	6,000
C19s to purchase	5,000

Therefore, the number of C19s to be purchased 5,000.

b. Compute the net benefit to the firm of manufacturing (rather than purchasing) a unit of C15. Repeat the calculation for a unit of C19.

Answer:

Net benefit to the firm of manufacturing a unit of C15 = 3 per unit of manufacturing

Net benefit to the firm of manufacturing a unit of C15 = 3 per unit of manufacturing

Calculation:

To calculate the net benefit to the firm of manufacturing a unit of C15 and C19, we need to deduct the Total variable cost from the Purchase price quoted.

The purchase price quoted for both C15 and C19 is 13.50 for each. So, we need to calculate the total variable cost.

The total variable cost is the sum of direct material, labor and variable overhead.

	C15	C19
Direct material	2.50	4.00
Direct labor	5.00	4.00
Variable overhead	3.00	2.50
Total variable cost	10.50	10.50

Then we need to deduct the Total variable cost from the Purchase price quoted, to get the Net benefit per unit of manufacturing.

	C15	C19
Purchase price quoted	13.50	13.50
Less: Total variable cost	10.50	10.50
Net benefit per unit of manufacturing	3.00	3.00

Therefore, the net benefit per unit of manufacturing for C15 and C19 is 3.00 each.

c. Which component(s) (C15 and/or C19) should Fowler manufacture with the limited machine hours available? Why?

Answer:

Fowler should manufacture C15 with the limited machine hours available.

Because the Net benefit of C15 per hour is 1.50 which is higher than the Net benefit of C19 per hour which is 1.20.

Calculation:

Net benefit per hour for C15:

The machine hours for C15 = 2 hours

Net benefit per unit of manufacturing = 3

Net benefit of C15 = Net benefit per unit of manufacturing / machine hours = 3 / 2 = 1.50 per hour

Net benefit per hour for C19:

The machine hours for C19 = 2.5 hours

Net benefit per unit of manufacturing = 3

Net benefit of C19 = Net benefit per unit of manufacturing / machine hours = 3 / 2.5 = 1.20 per hour

On the basis of this calculation, the Fowler should manufacture C15 first with the limited machine hours available.