Simple Management Accounting
Grandmaster Ltd produceshydraulic hoists which are used by a wide range of companies in the automotive industry. The costs of manufacturing and marketing hydraulic hoists at the company’s normal volume of 3,000 units per month are shown in Exhibit 1.
Costs per unit for hydraulic hoists
Unit manufacturing costs: $ $
Variable materials 100
Variable Labor 150
Variable overhead 50
Fixed overhead 120
Total unit manufacturing costs 420
Unit marketing costs:
Total unit marketing costs 190
Total unit cost $ 610
The following questions refer only to the data given above. Unless otherwise stated, as¬sume there is no connection between the sit¬uations described in the questions; each question is to be treated independently. Moreover, a regular selling price of $740 per unitfor hoists should be assumed unless otherwise stated. Ignore income taxes and other costs that are not mentioned in Exhibit 1or in a question itself.
Grandmaster Ltd can also manufacture and sell hydraulic pressure valves. Assume that the company is operating at about 70 per cent of capacity and has received an order from Glasgow Industries Ltd for 120,000 valves. Glasgow Industries manufactures a valve that is almost identical to the pressure valve produced by Grandmaster Ltd; however, a fire in Glasgow Industries’ valve plant has shut down its manufacturing operations. Glasgow needs the 120,000 valves over the next four months to meet commitments to its regular customers. Glasgow is prepared to pay $19 each for the valves. The cost of the pressure valve produced by Grandmaster Ltd is $20, calculated as follows:
Direct material $5.00
Direct labour 6.00
Manufacturing overhead 9.00
Assume that manufacturing overhead is applied to production at the rate of $18 per standard direct labour hour. This overhead is made up of the following components:
Variable manufacturing overhead $6.00
Fixed manuf. overhead (traceable) 8.00
Fixed manuf. Overhead (allocated) 4.00
Applied manuf. overhead rate $18.00
Additional costs incurred in connection with sales of the pressure valve include sales commissions of 5 per cent of sales, and freight expense of $1 per unit. However, the company does not pay sales commissions on special orders that come directly to management. In determining the selling prices of its valves, Grandmasteradds a 40 per cent mark-up to total product cost. This provides a $28 suggested selling price for the pressure valve. The Marketing Department,however,has set the current selling price at $27 in order to maintain market share.
Grandmaster’s production manager believes that the company can handle the Glasgow order without its current production schedule being disrupted. The order would, however, impose additional fixed factory overhead costs of $12,000 per month due to the need to employ additional production supervisors and factory office staff on a temporary basis. If Grandmaster’s management accepts the order, 30,000 pressure valves will be manufactured and shipped to Glasgow Industries each month for the next four months. Glasgow’s management has agreed to pay the shipping charges for the valves.
a. Determine how many direct labour hours would be required each month to fill the Glasgow Industries order. (1 mark)
b. Prepare an analysis showing the impact on profit of acceptingthe Glasgow Industries order. (2 marks)
c. Calculate the minimum unit price that Grandmaster could accept for the Glasgow Industries order without reducing net profit. (1 mark)
d. Identify the factors,other than price, that Grandmaster’s management should consider before accepting The Glasgow Industries order. (3 marks)
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