Question 5 (6.5 Points) A company produces 30,000 units per month from Product X

Question

Question 5 (6.5 Points) A company produces 30,000 units per month from Product X. The details of cost elements for this product are as follows: Labor: 0.25 hours are needed to produce one unit with a cost of $40 per labor hour . Material: 0.50 kg is needed to produce one unit with a cost of S3 per kg. Factory overheads: 100% of the total direct cost. . Packaging cost and other charges: 20% of the total cost. a. Assuming that the company desired profit is 20% of the t total manufacturing cost (direct costs, indirect costs, packaging costs, and other costs), use the "bottom-up approach to Product X. estimate the total manufacturing cost per unit and the selling price per unit for (3 Points) b. The company has performed a market survey and found that the best competitor's selling price for Product X is $31.5 per unit. The company has also performed a value engineering study on this product and found that the factory overheads are high and should be reduced Assuming that other requirements, costs, and charges remain the same; recalculate what should the factory overheads (as a percentage of the total direct cost) in order to achieve the target price of $31.5 per unit. (3.5 Points)

Explanation / Answer

Total no. of units produced per month = 30,000

Time invested to produce 30,000 units = 0.25*30,000 = 7500 hrs

Labor Cost per month = 40*7500 = $300,000

Material required to produce 30,000 units = 0.5*30000 = 15,000 kg

Material Cost per month = 3*15000 = $45000

So, Total direct cost = 300,000+45,000 = $345,000

Factory Overheads = 100% of (315,000) = $345,000

Direct cost + Overheads = $345,000 + $345,000 = $690,000

Packaging cost and other charges = 20% of 690,000 = $138,000

a) Total manufacturing cost = $690,000 + $138,000 = $828,000

In a month time frame

Total Manufacturing cost per unit = 828,000/30,000 = $27.6

Desired profit = 20% of $828,000 = $165,600

So, total Selling cost = 828,000 + 165,000 = $993,600

Selling Price per unit = 993,600/30,000 = $33.12

b) So now, selling price per unit = $31.5

Total selling Price for 30,000 units = 31.5*30000 = $945,000

Total direct cost = $345,000

Lets assume factory overheads = x

So, packaging cost and other charges = 20% of (345,000 + x) = 69,000 + 0.2x

So, total manufacturing cost = 345,000 + x + 69,000 + 0.2x = 414,000 + 1.2x

Company desired profit = 20% of manufacturing cost

Total Selling price - Total Manufacturing cost = 20% of maufacturing cost

945,000 - 414,000 - 1.2x = 0.2*(414,000 + 1.2x)

531,000 - 1.2x = 82,800 + 0.24x

448,200 = 1.44x;

So, x = 311,250

So, Factory overhead cost should be $311,250 if selling price per unit is $31.5

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