Lockitt Inc. 2020 Operating Budget Data Sheet Revenue Unit selling price December sales volume (locks) January sales volume (locks) February sales volume (locks) March sales volume (locks) April Sales volume (Locks) May sales volume (locks) June sales volume (locks) Materials Quantity per Duralock LD-paste (lbs.) Chem-glue (ml) Materials Unit Price LD-paste: Price per pound Chem-glue: Price per milliliter Inventory Policy Finished goods (%, units) LD-paste (%) Chem-glue (%, ml) Labor Rate LB075 LH075 Labor Usage LB075 (hours per batch) LH075 (hours per unit) Batch size Duralocks per batch Variable OH Per batch Per direct labor hour Fixed Overhead Budgeted Percentage Change New $ 88.00 0% 88 15,200 0% 15,200 15,800 0% 15,800 16,500 0% 16,500 16,600 0% 16,600 17,800 0% 17,800 17,700 0% 17,700 17,800 0% 17,800 Quantity per unit of output 350 Price $ 10.25 $ 0.05 % of next period's Min Max 10% 1,600 5% 5% Hourly rate $30 $15 1 0.1 50 $1,000 $50 Per month 40,000 Selling and Admin Fixed, per month 50,000 Variable, percentage of revenue 3% 300,000
After you prepared the operating budget for the first quarter, Lockden learned that one of the two molding machines used by the company needs a major overhaul soon. Since the company is considering cost reduction strategies in response to the economic uncertainty, this news was unfavorable. But Lockden realized that the overhaul is important and has decided to do the overhaul during the first quarter of 2020. The overhaul will cost US$100,000,7 and the machine will not be operational during the overhaul (i.e., the entire duration of the first quarter). The company is exploring the viability of the following options to handle this operational challenge:
Option 1: Lockitt, Inc. will run the functional molding machine two shifts per day, instead of one. Since LB075 labor is paid hourly, this proposal will not change the labor hours required. But the company must pay a higher wage rate to the employees in the second shift, causing the average LB075 rate to increase to $45 per hour. Changing to two shifts will increase the monthly fixed
Option 2: An engineer has suggested that the company should increase the batch size of the functional machine to 100 units during the overhaul of the other machine. To accommodate the large batch size, settings of the functional molding machine need to be changed to reduce the number of functions it performs. As a result, additional work will have to be completed using manual finishing labor. Under this scenario, LH075 time required per unit will change to 15 minutes.
a. Which of these two options should the company adopt if the decision is strictly based on financial factors (i.e., minimizing the cost)? Support your answer with calculations.
b. What is the net incremental cost of the overhaul (compared to the original budget) under the option you recommended above?
c. Given Lockden’s desire to pursue cost reduction strategies, he argues that the company should choose the option where costs are minimized. But you realize that other factors besides cost minimization should be considered when making decisions. What other factors should you consider before making this decision?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
