Tamworth Truck manufactures part YYY used in several of its truck models. 10,000 units are produced each year with production costs as follows:
Direct materials $ 45,000
Direct manufacturing labour 15,000
Variable support costs 35,000
Fixed support costs 25,000
Total costs $120,000
Tamworth Truck has the option of purchasing part YYY from an outside supplier at $11.20 per unit. If part YYY is outsourced, 40% of the fixed costs cannot be immediately converted to other uses (i.e. cannot be avoided).
a. Describe avoidable costs. What amount of the YYY production costs is avoidable?
b. Should Tamworth Truck outsource YYY? Why or why not?
c. What other items should Tamworth Truck consider before outsourcing any of the parts it currently manufactures?
Tamworth Pet Corporation manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Number of Setups Number of Components Direct Labour Hours
Standard 3 30 650
Deluxe 7 50 150
Overhead Costs $20,000 $60,000
Assume a traditional costing system applies the $80,000 of overhead costs based on direct labour hours.
a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?
Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead.
c. What is the total amount of overhead costs assigned to the standard model?
d. What is the total amount of overhead costs assigned to the deluxe model?
e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why?
Tamworth Company has the following information:
Month Budgeted Sales
In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month’s cost of sales.
Prepare a purchases budget for April through June (one column for each month), giving total figures for the quarter in the forth column.
Tamworth Cabinets is approached by Ms. Jenny Zhang, a new customer, to fulfil a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:
Direct materials $100
Direct labour 125
Variable manufacturing support 60
Fixed manufacturing support 75
Total manufacturing costs 360
mark-up (60%) 216
Targeted selling price $576
Tamworth Cabinets has excess capacity. Ms. Zhang wants the cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit.
a. For Tamworth Cabinets, what is the minimum acceptable price of this one-time-only special order?
b. Other than price, what other items should Tamworth Cabinets consider before accepting this one-time-only special order?
c. How would the analysis differ if there was limited capacity?