Setup Cost. Pointer Furniture Company manufac¬ tures and sells office desks. For efficiency and quality control reasons, the desks are manufactured in batches. For example, 10 high quality desks might be manufac¬ tured during the first two weeks in October and 50 units of a lower quality desk during the last two weeks. LO2 Because each model has its own unique manufacturing requirements, the change from one model to another requires the factory’s equipment to be adjusted. Pointer management wants to determine the most economical production run for each of the items in its product line by adapting the economic order quantity inventory model.

One of the cost parameters that must be determined before the model can be employed is the setup cost incurred when there is a change to a different furniture model. As an example, the Accounting Department has been asked to determine the setup cost for Model JE 40 in its junior executive line.

The Equipment Maintenance Department is responsi¬ ble for all changeover adjustments on production lines, in addition to the preventive and regular maintenance of all the production equipment. The equipment mainte¬ nance employees are paid $9 per hour, and employee benefits average 20% of wage costs. The other depart¬ mental costs, which include such items as supervision, depreciation, and insurance, total $50,000 per year. Two workers from the Equipment Maintenance Department are required to make the production change for Model JE 40. Each worker spends an estimated 5 hours in set¬ ting up the equipment as follows:

Machinerychanges. 3 hours Testing. 1 hour Machinery readjustments. 1 hour Total. 5 hours The production line on which Model JE 40 is manu¬ factured is operated by five workers. During the changeover, these workers assist the maintenance workers when needed and operate the line during the test run. However, they are idle for approximately 40% of the time required for the changeover and cannot be assigned to other jobs. The production workers are paid a basic wage of $7.50 per hour. Two factory overhead bases are used to apply the indirect costs, because some of the costs vary in proportion to direct labor hours, while others vary with machine hours. The fac¬ tory overhead rates applicable for the current year are as follows:

Based on Based on Direct Labor Machine Hours Hours Variable.

. $2.75

$ 5.00 Fixed.

. 2.25 15.00

$5.00

$20.00 These department overhead rates are based on an expected activity of 10,000 direct labor hours and 1,500 machine hours for the current year. This department is not scheduled to operate at full capacity because pro¬ duction capability currently exceeds sales potential.

The estimated cost of the direct materials used in the test run totals $200. Salvage materials from the test run should total $50.

Required:

(1) Estimate Pointer’s setup cost for desk Model JE 40, for use in the economic production run model.

(2) Identify cost items to include in estimating Pointer’s inventory carrying cost.