Lepidoptera Equipment Company (LEC) manufactures and distributes heavy construction equipment worldwide. LEC’s assistant controller, Bryana Wong, is aware that one of its primary competitors, Caterpillar, has implemented a remanufacturing process, which refinishes recycled engine parts to new part specifications and performance. Caterpillar encourages its customers (equipment-repair companies)

to recycle these parts by selling remanufactured parts with new-part warranties at a price much less than new parts if the customer returns an old part prior to purchasing a replacement. Wong believes that Lepidoptera must meet the competitive challenge posed by Caterpillar’s new program and sees an opportunity to improve the company’s financial and environmental performance.

Wong has asked you, as a new financial analyst at Lepidoptera, to analyze alternative processes for new and remanufactured parts. You have gathered the following information related to the remanufacture of an engine’s fuel-injection case, a part commonly discarded and replaced during a major engine repair.

The company carries no inventories.

Data Input New Remanufactured Sales volume per year, units 1,000,000 1,000,000 Sales price per unit $ 6.00 $ 4.00 Direct-material cost per unit $ 1.00 $ 0.12 Direct-labor cost per unit $ 1.00 $ 0.20 Machine hours per unit 0.16 0.05 Cycle time per unit, hours 0.26 0.20 Manufacturing overhead per year $1,200,000 $ 400,000 Total direct-labor cost per year $1,000,000 $ 200,000 Total machine hours per year 160,000 50,000 Total cycle time per year, hours 260,000 200,000 Required

a. Prepare estimates of cost per unit and total cost of goods sold per year using direct labor cost as the manufacturing overhead allocation base for new and remanufactured parts.

b. Prepare estimates of cost per unit and total cost per year using machine hours as the manufacturing overhead allocation base for new and remanufactured parts.

c. Prepare estimates of cost per unit and total cost per year using cycle time as the manufacturing overhead allocation base for new and remanufactured parts.

d. Prepare six annual gross margin estimates for sales of new and remanufactured parts using each of the overhead allocation bases. Write a short memo to Wong explaining your cost estimates and recommending which process to implement.