Basics of Variance Analysis, Variable Inputs Durable Door Company replaces garage doors for residential customers. Because of OBJECTIVE 3 the poor quality of materials used by its supplier, Durable Doors has had to replace 5 4 many doors due to unacceptable performance or breakage. Two years ago, the company decided to manufacture its own vinyl doors as a cost-saving measure and to better control quality. A strategically located plant involved in this type of manufacturing was acquired. To help ensure cost efficiency, a standard cost system was installed in the plant. The following standards have been established for the product's variable inputs: Standard Standard Quantity Standard Price rate in s Cet (5) Direct materials Direct labour Variable overhead Total SI61.70 1760 S 3.85 16.00 260 2 10 hes 210 hrs S200.76 The purchasing agent located a new source of slightly higher quality vinyl, and this material was used during the first week in January. Also, a new manufacturing process was implemented on a trial basis. The new process required a slightly lower level of skilled labour. The higher-quality material has no effect on labour utilization. However, the new manufacturing process was expected to reduce materials usage by 0.10 kilograms per door. During the first week, the company had the following actual results: Units produced Actual labour costs Actual labour hours Materials purchased and used Actual variable overhead costs 4,000 $134,725 8,500 166,000 kg @ $4.05 $39,750 Required: 1. CONCEPTUAL CONNECTION Compute the materials price and usage variances. Assume that the 0.10 kilogram per door reduction of materials occurred as expected and that the remaining effects are all attributable to the higher-quality material. Would you recommend that the purchasing agent continue to buy this quality, or should the usual quality be purchased? Assume that the quality of the end product is not affected significantly. Answer + Check figure: MUV = $7,700 F 2. CONCEPTUAL CONNECTION Compute the labour rate and efficiency variances. Assuming that the labour variances are attributable to the new manufacturing process, should it be continued or discontinued? In answering, consider the new process's materials reduction effect as well. Explain your reasoning Answer + Check figure: LRV = $1,275 F 3. CONCEPTUAL CONNECTION Refer to Requirement 2. Suppose that the industrial engineer argued that the new process should not be evaluated after only one week. His reasoning was that it would take at least a week for the workers to become efficient with the new approach. Suppose that the production is the same the second week and that the actual labour hours were 7,400 and the labour cost was $117,290. Should the new process be adopted? Assume the variances are attributable to the new process. Assuming production of 4,000 units per week, what would be the projected annual savings? (Include the materials reduction effect.) Answer + Check figure: LEV = $16,000 F