Question

A company uses a long-run time horizon to price its product, an electronic component used in
aircraft. To produce a normal production run for a year of 100,000 units direct materials are $90,000;
direct labour is $180,000; and, rent on leased equipment is $106,000 per year. Currently re-work is
running at 4% of production, after testing. The company has the capacity to test 10 units per hour.
Manufacturing Overhead has two cost drivers: testing (cost driver is testing hours at $2.50 per hour);
and, rework (cost driver is units reworked at $80 per unit re-worked).
Calculate current total manufacturing costs for 100,000 units

Answer 1

Answer :

Direct Material Cost for 100,000 units = $90,000

Direct Labor Cost for 100,000 units = $180,000

Rent on leased equipment = $106,000

Capacity to test units per hour = 10 units per hour

Testing Cost per hour = $2.50 per hour

Testing cost for 100,000 units = $2.50 x (100,000 / 10) = $25,000

Re-work = running at 4% of production

Re-work cost = $80 per unit re-worked

Re-work cost for 100,000 units = $80 x (100,000 x 4%) = $320,000

Total manufacturing cost = Direct Material Cost + Direct Labor Cost + Rent on leased equipment + Testing cost for 100,000 units+ Re-work cost for 100,000 units

= $90,000 + $180,000 + $106,000 + $25,000 + $320,000

= $721,000

So, Total manufacturing costs for 100,000 units = $721,000