John Marshall's is a supply manager for Uniplastic Inc., a manufacturer of pool equipment and supplies. PVC, Inc. his supplier has quoted $1.10 per piece for a plastic molded part. Mr.

Marshall wants to determine if this price is reasonable. The annual usage is 1,000,000 per year and due to engineering's preference for PVC, Inc's molding machines they are currently John's sole source.

Since PVC, Inc. has refused to provide a cost breakdown, John decides it will be necessary to develop a "should cost" for the part. Working with his engineering and production departments, they estimate that the direct material cost should be $.0989 per unit and the direct labor cost should be $.241 per piece requested in this quote.

From a review of annual reports of similar plastics firms, Mr. Marshall discovers that extrusion companies of the same size doing similar work have the following average ratios:

The Material Overhead rate =10% of Material Cost

The Indirect Factory Overhead rate =118% of Direct Labor Cost The Sales, General & Admin. (SG&A) Expense rate =13%

Profit =10%

1a. Calculate "should cost" for this extrusion-clearly show your work  

1b. Indicate how you would use the results of your "should cost" analysis.