Dentech, Inc., uses 12 units of part RM67 each month in the production of dentis

Question

Dentech, Inc., uses 12 units of part RM67 each month in the production of dentistry equipment. The cost of manufacturing one unit of RM67 is the following:

     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 $54,000.

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?

Assume Dentech is able to rent out all its idle capacity for $84,000 per month. If Dentech decides to purchase the 12 units from Scott Supply, Dentech’s monthly cost for RM67 would increase (or decrease) by what amount?

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 $168,000 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?

Dentech, Inc., uses 12 units of part RM67 each month in the production of dentistry equipment. The cost of manufacturing one unit of RM67 is the following:

Explanation / Answer

Cost of Production of RM 67 Per Unit $ Direct Material            2,500 Material Handling Cost                500 Direct Labour          33,000 Manufacturing Overhead- Variable          16,500 (1/3 X 49500) Variable Cost          52,500 Fixed Cost          33,000 (2/3 X 49500) Total Cost per Unit          85,500 No. of Unit produced in a month 12 Total Fixed Cost per Month = 12 X 33000 = $ 396000 1) Purchase the RM 67 From Scott supply in $ 54000 per piece No Dentech should not purchased the goods from Scott supply, as the price from the scott supply is higher by $ 1500 per pc from the variable cost of Dentech. 2) If rent out the idle capacity for a Rent of $ 84000 per month Income from rent per month $ 84000 Production Nos 12 Earning per pc $ 7000 Extra Cost to be paid per pc $ 1500 Net saving per pc 5500 Total Cost Saving per month $ 66000 Saving cost per month will be $ 66000 and per pc will be $ 5500 . 3) Production of another product Contribution from another product $ 168000 Production Nos 12 Earning per pc $ 14000 Extra Cost to be paid per pc $ 1500 Net saving per pc 12500 Total Cost Saving per month $ 150000 Saving cost per month will be $ 150000 and per pc will be $ 14000 .

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