In: Accounting
Hat Tricks Company (HTC) is a Buffalo, New York, manufacturer of hats and gloves. Recently, the company purchased a new machine to aid in producing the hat product lines. Production efficiency on the new machine increases with the workforce experience. It has been shown that as cumulative output on the new machine increases, average labor time per unit decreases up to the production of at least 3,200 units. As HTC’s cumulative output doubles from a base of 100 units produced, the cumulative average labor time per unit declines by a learning rate of 90%.
HTC has developed a new style of men’s hat to be produced on the new machine. One hundred of these hats can be produced in a total of 10 labor hours. All other direct costs to produce each hat are $25 per hat, excluding direct labor cost. Direct labor cost per hour is $84. Fixed costs are $8,000 per month, and HTC has the capacity to produce 3,200 hats per month.
Required:
HTC plans to set the selling price for the new men’s hat at 200% of direct production cost. If the company is planning to sell 100 hats, what is the selling price? If the plan is to sell 800 hats, what should be the selling price? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Ans:
Selling price if 100Hats sold
Direct labour hours required to produce first 100 hats=10hr
Direct labour cost =10hr*84$/hour
=840$
Other Direct cost =100hats*25$/hat
=2,500$
Total Direct cost. =840+2500 i.e 3,340$
Selling price is 200% of Direct production cost
3,340$*200%=6,680$
So selling price per hat =6680/100hats i.e 66.8$
Note:fixed cost is not a Direct cost Because it is not incurred Directly for a product that is over all cost for that period so it is period cost not production cost
2)if company plans to sell 800hats
Hear the concept of learning curve is used at a learning rate of 90% to calculate Direct labour hours to produce 800hats
Note: since the first 100hats takes 10hours and 90% learning curve applies The average time will become 9hours,when production is quadrupled it will become 8.1hours like that
Cumulative Quantity | Average time per 100 hats(hours) | Cumulative time taken (hours) |
100 | 10 given | 10 |
200 | 10*90%=9 | 18 (2*9) |
400 | 9*90%=8.1 | 32.4 (4*8.1) |
800 | 8.1*90%=7.29 | 58.32 (8*7.29) |
Direct labour cost to produce 800hats
58.32hours*84$/hour=4,900$
Other Direct production cost=800hats*25$/hat
=20,000$
Total Direct production cost =24,900$
Direct production cost per hat=24,900/800hats
=31.13$
Selling price =31.13$*200%
=62.25$