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Chapter 2: Problem 10
What are three different types of inventory that manufacturing companies hold?
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Sweetum Candies manufactures jaw-breaker candies in a fully automated process. The machine that produces candies was purchased recently and can make 4,100 per month. The machine costs \(\$ 9,000\) and is depreciated using straight line depreciation over 10 years assuming zero residual value. Rent for the factory space and warehouse, and other fixed manufacturing overhead costs total \(\$ 1,200\) per month. Sweetum currently makes and sells 3,800 jaw-breakers per month. Sweetum buys just enough materials each month to make the jaw-breakers it needs to sell. Materials cost 30 cents per jawbreaker. Next year Sweetum expects demand to increase by \(100 \%\). At this volume of materials purchased, it will get a \(10 \%\) discount on price. Rent and other fixed manufacturing overhead costs will remain the same. 1\. What is Sweetum's current annual relevant range of output? 2\. What is Sweetum's current annual fixed manufacturing cost within the relevant range? What is the annual variable manufacturing cost? 3\. What will Sweetum's relevant range of output be next year? How if at all, will total annual fixed and variable manufacturing costs change next year? Assume that if it needs to Sweetum could buy an identical machine at the same cost as the one it already has.
Jim Anderson works in the production department of Midwest Steelworks as a machine operator. Jim, a long-time employee of Midwest, is paid on an hourly basis at a rate of \(\$ 20\) per hour. Jim works five 8 -hour shifts per week Monday-Friday \((40\) hours). Any time Jim works over and above these 40 hours is considered overtime for which he is paid at a rate of time and a half (\$30 per hour). If the overtime falls on weekends, Jim is paid at a rate of double time \((\$40 per hour)\). Jim is also paid an additional \(\$ 20\) per hour for any holidays worked, even if it is part of his regular 40 hours. Jim is paid his regular wages even if the machines are down (not operating) due to regular machine maintenance, slow order periods, or unexpected mechanical problems. These hours are considered "idle time." During December Jim worked the following hours: $$\begin{array}{ccc} & \begin{array}{c} \text { Hours worked including } \\ \text { machine downtime } \end{array} & \text { Machine downtime } \\ \hline \text { Week 1 } & 44 & 3.5 \\ \text { Week 2 } & 43 & 6.4 \\ \text { Week 3 } & 48 & 5.8 \\ \text { Week 4 } & 46 & 2 \end{array}$$ Included in the total hours worked are two company holidays (Christmas Eve and Christmas Day) during Week 4. All overtime worked by Jim was Monday-Friday, except for the hours worked in Week 3. All of the Week 3 overtime hours were worked on a Saturday. 1\. Calculate (a) direct manufacturing labor, (b) idle time, (c) overtime and holiday premium, and (d) total earnings for Jim in December. 2\. Is idle time and overtime premium a direct or indirect cost of the products that Jim worked on in December? Explain.
Why do managers consider direct costs to be more accurate than indirect costs?
Gayle's Glassworks makes glass flanges for scientific use. Materials cost \(\$ 1\) per flange, and the glass blowers are paid a wage rate of \(\$ 28\) per hour. A glass blower blows 10 flanges per hour. Fixed manufacturing costs for flanges are \(\$ 28,000\) per period. Period (nonmanufacturing) costs associated with flanges are \(\$ 10,000\) per period, and are fixed. 1\. Graph the fixed, variable, and total manufacturing cost for flanges, using units (number of flanges) on the \(x\) -axis. 2\. Assume Gayle's Glassworks manufactures and sells 5,000 flanges this period. Its competitor, Flora's Flasks, sells flanges for \(\$ 10\) each. Can Gayle sell below Flora's price and still make a profit on the flanges? 3\. How would your answer to requirement 2 differ if Gayle's Glassworks made and sold 10,000 flanges this period? Why? What does this indicate about the use of unit cost in decision making?
Define the following: direct material costs, direct manufacturing-labor costs, manufacturing overhead costs, prime costs, and conversion costs.
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