Dentech, Inc., uses 11 units of part RM67 each month in the production of dentis
ID: 2530507 • Letter: D
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:
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 $53,000.
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 $83,000 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?
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 $167,000 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 11 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
Dentech Inc
Incremental unit cost if RM67 is purchased from Scott:
Purchase price $53,000
Material handling (20% of material cost) $10,600
Total cost of purchase $63,600
Incremental unit cost if RM67 is manufactured:
Direct material $2,000
Material handling$400
Direct labor$32,000
Variable manufacturing overhead$16,000
Total cost to manufacture$50,400
Difference in costs –
Purchase cost$63,600
Manufacture cost$50,400
Increase in unit cost if RM67 is purchased = $13,200
Increase in Purchase cost of 11 units= 11 x 13,200 = $145,200
Less: rental income from use of idle space$83,000
Increase in monthly cost $62,200
Contribution loss by not manufacturing another product $167,000
Savings in purchase cost of 11 units of RM67 (11 x 13,200)$145,200
Cost of using idle capacity to manufacture RM67$21,800
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