Question

Wellsley Containers currently uses a recycled plastic to make bottles for the food industry.

Current bottle production? information:

The cost and time standards per batch of 10,000 bottles are as ?follows:

Plastic 360 kilograms at $11.00 per kg

Direct labor 6.0 hours at $20.00 per hour The variable manufacturing overhead rate is based on total estimated variable manufacturing overhead of $500,000 and estiamted total DLH of 10,000. Wellsley allocates its variable manufacturing overhead based on direct labor hours (DLH). Proposed changes to bottle design and production? process: The container division manager is considering having both the bottle redesigned and the bottle production process reengineered so that the plastic usage would drop by 30 % overall due both to generating less scrap in the manufacturing process and using less plastic in each bottle. In addition to decreasing the amount of plastic used in producing the? bottles, the additional following benefits would be?realized: a. Direct labor hours would be reduced by 20 % because less scrap would be handled in the production process. b. Total estimated variable manufacturing overhead would be reduced by 10 % because less scrap would need to be hauled?away, less electricity would be used in the production? process, and less inventory would need to be stocked. 1. Calculate the standard cost per batch of 10,000bottles using the current data? (before the company makes any? changes). Include direct? materials, direct? labor, and variable manufacturing overhead in the standard cost per unit. Manufacturing cost standard cost per batch direct materials $3,960 Direct labor 120 Variable MOH 300 Total standard cost $4,380 2. Calculate the standard cost per batch of 10,000 bottles if the company makes the changes to the bottle design and production process so that less plastic is used. Include direct? materials, direct? labor, and variable manufacturing overhead in the standard cost per unit. Manufacturing cost standard cost per batch direct materials $ direct labor variable MOH Total standard cost 3. Calculate the cost savings per batch by comparing the standard cost per batch under each scenario? (current versus proposed? change). Assume that the total cost to implement the changes would be $434,700.How many batches of bottles would need to be produced after the changes to have the cost savings total equal the cost to make these? changes? 4. What other benefits might arise from making this change to using less plastic in the manufacture of the? bottles? Are there any? risks? What would you recommend the company? do?

Answer 1

Formula sheet

A	B	C	D	E	F	G	H	I	J	K	L	M	N
2
3		Before re-engineering the process:
4		Direct Materials i.e. Plastic required per batch	360	Kg
5		Price of Plastic	11	Per Kg
6		Direct Labor per Batch	6	hours
7		Labor Rate	20	per hour
8		Estimated Variable Manufacturing Overhead	500000
9		Estimated Labour Hours	10000
10		Overhead Rate	=D8/D9
11
12		Changes due to re-engineering:
13		Reduction in plastic usage	0.3
14		Reduction in direct labour hours	0.2
15		Reduction in variable manufacturing overhead	0.1
16
17		After re-engineering the process:
18		Direct Materials i.e. Plastic required per batch	=D4*(1-D13)	Kg
19		Price of Plastic	11	Per Kg
20		Direct Labor per Batch	=D6*(1-D14)	hours
21		Labor Rate	20	per hour
22		Estimated Variable Manufacturing Overhead	=D8*(1-D15)
23		Estimated Labour Hours	=D9*(1-D14)
24		Overhead Rate	=D22/D23
25
26		1)
27		Standard cost per batch using current data before any changes:
28		Manufacturing cost	Standard cost per batch
29		Direct materials	=D4*D5
30		Direct labor	=D6*D7
31		Variable MOH	=D10*D6
32		Total standard cost	=SUM(D29:D31)
33
34		Hence Standard Cost per Batch with current data is	=D32
35
36		2)
37		Standard cost per batch after re-engineering the process:
38		Manufacturing cost	Standard cost per batch
39		Direct materials	=D18*D19
40		Direct labor	=D20*D21
41		Variable MOH	=D24*D20
42		Total standard cost	=SUM(D39:D41)
43
44		Hence Standard cost per batch after re-engineering the process is	=D42
45
46		3)
47
48		Standard Cost per Batch with current data	=D34
49		Standard cost per batch after re-engineering the process	=D44
50		Cost saving per Batch	=D48-D49	=D48-D49
51
52		Hence cost saving per batch due to re-engineering is	=D50
53
54		Cost of implementing the changes	434700
55
56		Number of Batches required to be produced to cover the cost	=Cost of implementation / Cost saving per batch
57			=D54/D52	=D54/D52
58
59		Hence number of Batches required is	=D57
60
61		4)
62		The scrap generated will be lesser due to less amount of scrap generated.
63		Fixed overhead may also decrease due to less scrap generated such as rent expense may decrease as space required to store the scrap will be lesser.
64		Also, transportation cost will decrease due to lesser amount of materials required.
65
66		Using less plastic in the bottle may have negative impact on the quality of the bottle.
67		Therefore, market acceptance of the lower weight bottle need to be checked before implementation of the project.
68