Question
Cincinnati Flow Technology (CFT) has purchased 10,000 pumps annually from Kobec, Inc. Because the price keeps increasing and reached $102.00 per unit last year, CFTs
Cincinnati Flow Technology (CFT) has purchased 10,000 pumps annually from Kobec, Inc. Because the price keeps increasing and reached $102.00 per unit last year, CFTs management has asked for an estimate of the cost of manufacturing the pump in CFTs facilities. CFT makes stampings and castings and has little experience with products requiring assembly. The engineering, manufacturing, and accounting departments have prepared a report for management which includes the following estimate for an assembly run of 10,000 pumps. Additional production employees would be hired to manufacture the pumps but no additional equipment, space, or supervision would be needed. The report states that total costs for 10,000 units are estimated at $1,435,500 or $143.55 per unit. The current purchase price is $102.00 per unit, so the report recommends continued purchase of the product. Components (outside purchases) $ 180,000 Assembly labor* 450,000 Manufacturing overhead 675,000 General and administrative overhead 130,500 Total costs $ 1,435,500 *Assembly labor consists of hourly production workers. Manufacturing overhead is applied to products on a direct-labor-dollar basis. Variable-overhead costs vary closely with direct-labor dollars. Fixed overhead 50 % of direct-labor dollars Variable overhead 100 % of direct-labor dollars Manufacturing-overhead rate 150 % of direct-labor dollars General and administrative overhead is applied at 10 percent of the total cost of material (or components), assembly labor, and manufacturing overhead.
Required: 1-a. Were the analysis prepared by Cincinnati Flow Technologys engineering, manufacturing, and accounting departments and their recommendation to continue purchasing the pumps correct? Yes No
1-b. Calculate the relevant cost per unit.
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