Chenango Industries uses 15 units of part JR63 each month in theproduction of radar equipment. The cost of manufacturing one unitof JR63 is the following:
| |
| Direct material | $ | 4,500 | |
| Material handling (20% of direct-material cost) | | 900 | |
| Direct labor | | 31,000 | |
| Manufacturing overhead (150% of direct labor) | | 46,500 | |
| Total manufacturing cost | $ | 82,900 | |
|
Material handling represents the direct variable costs of theReceiving Department that are applied to direct materials andpurchased components on the basis of their cost. This is a separatecharge in addition to manufacturing overhead. Chenango Industries’annual manufacturing overhead budget is one-third variable andtwo-thirds fixed. Scott Supply, one of Chenango Industries’reliable vendors, has offered to supply part number JR63 at a unitprice of $51,000.
Required:
- If Chenango Industries purchases the JR63 units from Scott, thecapacity Chenango Industries used to manufacture these parts wouldbe idle. Should Chenango Industries decide to purchase the partsfrom Scott, the unit cost of JR63 would increase (or decrease) bywhat amount?
- Assume Chenango Industries is able to rent out all its idlecapacity for $81,000 per month. If Chenango Industries decides topurchase the 15 units from Scott Supply, Chenango’s monthly costfor JR63 would increase (or decrease) by what amount?
- Assume that Chenango Industries does not wish to commit to arental agreement but could use its idle capacity to manufactureanother product that would contribute $165,000 per month. IfChenango’s management elects to manufacture JR63 in order tomaintain quality control, what is the net amount of Chenango’s costfrom using the space to manufacture part JR63?
