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Cost Direct materials Direct labor Variable manufacturing overhead Allocated fixed overhead Casting $150 90 80 50 $370 Finishing S 13 100 130 Inspection $ 0
Cost Direct materials Direct labor Variable manufacturing overhead Allocated fixed overhead Casting $150 90 80 50 $370 Finishing S 13 100 130 Inspection $ 0 40 40 Packing $ 7 40 Total $170 270 290 60 85 250 $303 $165 $142 $980 Destin Company produces water control valves, made of brass, which it sells primarily to builders for use in commercial real estate construction. These valves must meet rigid specifications (ie., the quality tolerance is small). Valves that, lipon Inspection, get rejected are returned to the Casting Department; that is, they are returned to stage 1 of the four-stage manufacturing process. Rejected items are melted and then recast. As such, no new materials in Casting are required to rework these items. However, new materials must be added in the Finishing Department for all reworked valves. As the cost accountant for the company, you have prepared the following cost data regarding the production of a typical valve: Implicom king Casting $150 Tolit 3110 CD Direct materials Ditt lisbor Variable mercufacturint overhead Allocated fixed overhead Pishing 3 13 100 110 270 60 20 90 $570 $100 $14 The company, spurred by intense price pressures from forelgn manufacturers, recently initiated a number of quality programs. As a result, the rejection rate for valves has decreased from 5.9% to 4.6% of annual output (equal in total to 15.000 units). The reduction in relect rates has enabled the company to reduce its inventory holdings from $490,000 to $295,000. Destin estimates that the annual financing cost associated with inventory holdings is 12%. 1. Estimated annual manufacturing cost 2. Annual financing cost savings 3. Total estimated savings
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