Question

Dentech, Inc., uses 11 units of part RM67 each month in the production of dentistry equipment. The cost of manufacturing one unit of RM67 is the following:

Direct material	$	4,000
Material handling (20% of direct-material cost)		800
Direct labor		33,000
Manufacturing overhead (150% of direct labor)		49,500
Total manufacturing cost	$	87,300

Material handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Dentech’s annual manufacturing overhead budget is one-third variable and two-thirds fixed. Scott Supply, one of Dentech’s reliable vendors, has offered to supply part number RM67 at a unit price of $57,000.

1. If Dentech purchases the RM67 units from Scott, the capacity Dentech used to manufacture these parts would be idle. Should Dentech decide to purchase the parts from Scott, the unit cost of RM67 would increase (or decrease) by what amount?

2. Assume Dentech is able to rent out all its idle capacity for $87,000 per month. If Dentech decides to purchase the 11 units from Scott Supply, Dentech’s monthly cost for RM67 would increase (or decrease) by what amount?

3. Assume that Dentech does not wish to commit to a rental agreement but could use its idle capacity to manufacture another product that would contribute $171,000 per month. If Dentech’s management elects to manufacture RM67 in order to maintain quality control, what is the net amount of Dentech’s cost from using the space to manufacture part RM67?

Answer 1

1
Manufacturing Cost of RM67
Material	4000
Material Handling	800
Labour	33000
Manu. O/H	16500	(49500*1/3)
Cost of Production	54300
Offer price from Scott	57000
Benefit in Manufacturing	2700
No, Should not purchase it's costly by 2700 per unit
Note: 2/3 rd of manuf o/h would not be consider
2
Manufacturing:
Cost of 11 RM67	597300	(54300*11)
Purchase:
Purchase cost	627000	(57000*11)
Less Benefit due to purchase	87000
Net Purchase cost	540000
Net Benefit due to purchase	57300
3. If manufacture another product
Purchase:
Purchase cost	627000	(57000*11)
Less Benefit due to purchase	171000
Net Purchase cost	456000
Manufacturing:
Cost of 11 RM67	597300	(54300*11)
Net cost of space	141300	(597300-456000)