Casting Technology Resources (CTR) has purchased 10,000 pumps annually from Kobec, Inc

Accounting May 23, 2021

Casting Technology Resources (CTR) has purchased 10,000 pumps annually from Kobec, Inc. Because the price keeps increasing and reached $68.00 per unit last year, CTR’s management has asked for an estimate of the cost of manufacturing the pump in CTR’s facilities. CTR makes stampings and castings and has little experience with products requiring assembly.

The engineering, manufacturing, and accounting departments have prepared a report for management that includes the following estimate for an assembly run of 10,000 pumps. Additional production employees would be hired to manufacture the pumps but no additional equipment, space, or supervision would be needed.

The report states that total costs for 10,000 units are estimated at $957,000, or $95.70 per unit. The current purchase price is $68.00 per unit, so the report recommends continued purchase of the product.


Components (outside purchases)	$	120,000
Assembly labor^*		300,000
Manufacturing overhead^†		450,000
General and administrative overhead^‡		87,000
Total costs	$	957,000

^*Assembly labor consists of hourly production workers.

^†Manufacturing overhead is applied to products on a direct-labor-dollar basis. Variable-overhead costs vary closely with direct-labor dollars.


Fixed overhead	50	%	of direct-labor dollars
Variable overhead	100	%	of direct-labor dollars
Manufacturing-overhead rate	150	%	of direct-labor dollars

^‡General and administrative overhead is applied at 10 percent of the total cost of material (or components), assembly labor, and manufacturing overhead.

Required:

1-a. Was the analysis prepared by Casting Technology Resources’ engineering, manufacturing, and accounting departments correct?

1-b. Calculate the relevant cost per unit.

Expert Solution

Answer:

a&b.

Analysis prepared is not correct. Potential labor cost improvement are ignored. Following incremental cost analysis should have been prepared to decide whether pump should be manufactured :

	Cost of 10000 units assembly run	per unit
Purchased components	$120,000	$12
Assembly labour	$300,000	$30
Variable manufacturing overhead	$300,000	$30
Total relevant cost	$720,000	$72

Fixed factory overhead costs and general and administrative overhead costs have not been included because they are not relevant; these costs would not increase, because no additional equipment,space or supervision would not be required if pump were manufactured.

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