Fixed selling & admin costs (Note 3) Total cost Labour hours per unit Machine hours per unit 0.26 $7.21 0.04 0.25 0.40 $10.85 0.05 0.25 0.46 $13.16 0.06 1.00 Unit sales Selling price per unit 100,000 $7.50 Master Tool Corporation Limited (MTCL) is a private company that currently manufactures 3 different pliers. Melissa Scranton, the company president is concerned that MTCL has been losing its market share, and its operating results are deteriorating. You are working as a summer student at MTCL. The company controller is away on vacation and Melissa has asked you to have a look at the production and sale issues MTCL is currently experiencing. In your review of direct manufacturing costs, you note that MTCL has recently upgraded to computer- aided manufacturing equipment that has virtually eliminated waste and spoiled units. As a result, direct labour costs have been cut by 20% per year over the last 5 years. Melissa doesn't think it is possible to reduce costs any further. Melissa was able to provide you with the standard cost report (Appendix 1) that was put together when planning for the current year's budget. This report explains how MTCL currently allocates overhead costs. 300,000 $12.00 70,000 $14.50 Notes: 1. Manufacturing overhead is allocated to products at a predetermined rate based on direct labour in dollars. Budgeted overhead. $2.975,000* Budgeted direct labout $297,500 The VP of Sales at MTCL things he can improve results by adding a new product line - Wrench Sets (Appendix 2). He is certain the wrench sets will make money, but the cost and profit projections aren't supporting his claim. $10.00 per dollar of direct labour hour cost The VP of Manufacturing is concerned about scheduling and doesn't know how she is going to manage production, especially if the wrench sets are added. She tells you, "We've been working at close to our capacity, using 170,000 of the available 180,000 machine hours, and costs have been right on target . It's the scheduling of work on machines that is causing me the biggest headache. We're barely managing to keep up with the sales orders, but with any increase in sales, we'll end up with backorders." *90% of total overhead is composed of depreciation, regular maintenance, related salaries, and other fixed manufacturing costs. The remaining 10% of overhead costs are variable and include the costs of operating the machines 2. Variable selling and administrative costs consist entirely of sales commissions. Commission amounts per unit were negotiated with the salespeople two years ago. 3. Fixed selling and administrative costs are allocated to products at a predetermined rate based on total manufacturing costs = Budgeted fixed selling & admin costs Budgeted total manufacturing costs $177.680 $4,442,000 4% of manufacturing costs Appendix 2 Wrench Set Product Line The estimated annual sales volume is 40,000 wrench sets. Each set requires 0.5 machine hours, and the selling price per set is $14.00 The costs per set will be: Required: 1) MTCL currently allocates non-direct costs to product lines based on a variety of drivers (Appendix 1). Melissa would like you to review the current allocations. a. Please advise whether the current allocations for Manufacturing Overhead Cost. Variable Selling & Admin Cost, and Fixed Selling & Admin Cost are appropriate. If they are not appropriate, suggest improvement(s) and explain how the changed allocations would be better. (5 marks) b. Based on (a), provide the updated full cost per unit for each of the current product lines. (16 marks) 2) Melissa would like to know whether the wrench sets have the potential to be profitable. Prepare an incremental contribution analysis to help Melissa with the quantitative aspect of this decision. (11 marks) 3) The VP of Manufacturing would like your recommendation on the best way to utilize the production capacity given the budgeted sales (including wrench sets) (13 marks) Appendix 1 Master Tool Corporation Limited Standard Cost Summary For the year ending July 31, 20x2 Economy 15-cm 20-cm pliers pliers pliers Standard unit costs: Direct materials $1.10 $2.75 $3.35 Direct labour 0.50 0.65 0.75 Overhead (Note 1) 5.00 6.50 7.50 Total manufacturing costs 6.60 9.90 11.60 Variable selling & admin costs (Note 2) 0.35 0.55 1.10 Direct materials Direct labour Overhead Variable selling & admin costs Fixed selling & admin costs Total costs $ 400 1.00 10.00 1.10 0.46 16.56 Net loss per set ($2.56) Overhead cost per set have been calculated consistent with the pliers - that is, estimated direct labour hour cost x $10.00, or $1.00 x $10.00 = $10.00 Fixed selling and administrative costs comprise additional advertising costs of $18,550 that would need to be incurred to sell the wrench sets. Fixed selling & admin costs (Note 3) Total cost Labour hours per unit Machine hours per unit 0.26 $7.21 0.04 0.25 0.40 $10.85 0.05 0.25 0.46 $13.16 0.06 1.00 Unit sales Selling price per unit 100,000 $7.50 Master Tool Corporation Limited (MTCL) is a private company that currently manufactures 3 different pliers. Melissa Scranton, the company president is concerned that MTCL has been losing its market share, and its operating results are deteriorating. You are working as a summer student at MTCL. The company controller is away on vacation and Melissa has asked you to have a look at the production and sale issues MTCL is currently experiencing. In your review of direct manufacturing costs, you note that MTCL has recently upgraded to computer- aided manufacturing equipment that has virtually eliminated waste and spoiled units. As a result, direct labour costs have been cut by 20% per year over the last 5 years. Melissa doesn't think it is possible to reduce costs any further. Melissa was able to provide you with the standard cost report (Appendix 1) that was put together when planning for the current year's budget. This report explains how MTCL currently allocates overhead costs. 300,000 $12.00 70,000 $14.50 Notes: 1. Manufacturing overhead is allocated to products at a predetermined rate based on direct labour in dollars. Budgeted overhead. $2.975,000* Budgeted direct labout $297,500 The VP of Sales at MTCL things he can improve results by adding a new product line - Wrench Sets (Appendix 2). He is certain the wrench sets will make money, but the cost and profit projections aren't supporting his claim. $10.00 per dollar of direct labour hour cost The VP of Manufacturing is concerned about scheduling and doesn't know how she is going to manage production, especially if the wrench sets are added. She tells you, "We've been working at close to our capacity, using 170,000 of the available 180,000 machine hours, and costs have been right on target . It's the scheduling of work on machines that is causing me the biggest headache. We're barely managing to keep up with the sales orders, but with any increase in sales, we'll end up with backorders." *90% of total overhead is composed of depreciation, regular maintenance, related salaries, and other fixed manufacturing costs. The remaining 10% of overhead costs are variable and include the costs of operating the machines 2. Variable selling and administrative costs consist entirely of sales commissions. Commission amounts per unit were negotiated with the salespeople two years ago. 3. Fixed selling and administrative costs are allocated to products at a predetermined rate based on total manufacturing costs = Budgeted fixed selling & admin costs Budgeted total manufacturing costs $177.680 $4,442,000 4% of manufacturing costs Appendix 2 Wrench Set Product Line The estimated annual sales volume is 40,000 wrench sets. Each set requires 0.5 machine hours, and the selling price per set is $14.00 The costs per set will be: Required: 1) MTCL currently allocates non-direct costs to product lines based on a variety of drivers (Appendix 1). Melissa would like you to review the current allocations. a. Please advise whether the current allocations for Manufacturing Overhead Cost. Variable Selling & Admin Cost, and Fixed Selling & Admin Cost are appropriate. If they are not appropriate, suggest improvement(s) and explain how the changed allocations would be better. (5 marks) b. Based on (a), provide the updated full cost per unit for each of the current product lines. (16 marks) 2) Melissa would like to know whether the wrench sets have the potential to be profitable. Prepare an incremental contribution analysis to help Melissa with the quantitative aspect of this decision. (11 marks) 3) The VP of Manufacturing would like your recommendation on the best way to utilize the production capacity given the budgeted sales (including wrench sets) (13 marks) Appendix 1 Master Tool Corporation Limited Standard Cost Summary For the year ending July 31, 20x2 Economy 15-cm 20-cm pliers pliers pliers Standard unit costs: Direct materials $1.10 $2.75 $3.35 Direct labour 0.50 0.65 0.75 Overhead (Note 1) 5.00 6.50 7.50 Total manufacturing costs 6.60 9.90 11.60 Variable selling & admin costs (Note 2) 0.35 0.55 1.10 Direct materials Direct labour Overhead Variable selling & admin costs Fixed selling & admin costs Total costs $ 400 1.00 10.00 1.10 0.46 16.56 Net loss per set ($2.56) Overhead cost per set have been calculated consistent with the pliers - that is, estimated direct labour hour cost x $10.00, or $1.00 x $10.00 = $10.00 Fixed selling and administrative costs comprise additional advertising costs of $18,550 that would need to be incurred to sell the wrench sets