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Destin Company produces water control valves, made of brass, that it sells primarily to builders for use in commercial real estate construction. These valves must meet rigid specifications (i.e., the quality tolerance is small). Valves that, upon 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: Cost Direct materials Direct labor Variable manufacturing overhead Allocated fixed overhead Casting $ 250 140 180 100 $ 670 1. Estimated annual manufacturing cost savings 2. Annual financing cost savings Finishing $11 150 180 110. $ 451 $ Inspection $0 40 35 135 $ 210 Packing $9 The company, spurred by intense price pressures from foreign manufacturers, recently initiated a number of quality programs. As a result, the rejection rate for valves has decreased from 7.9% to 6.4% of annual output (equal in total to 18,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $590,000 to $345,000. Destin estimates that the annual financing cost associated with inventory holdings is 10%. 23,000 40 35 105 $189 Required: 1. What are the estimated manufacturing cost savings per year associated with the reduction in rework costs? 2. What are the annual financing cost savings associated with the reduction in inventory holdings? 3. Provide a dollar estimate of the total annual cost savings associated with the recently enacted quality improvements. (Do not round intermediate calculations.) Total $ 270 370 430 450 ZLERLE $ 1,520

Destin Company produces water control valves, made of brass, that it sells primarily to builders for use in commercial real estate construction. These valves must meet rigid specifications (i.e., the quality tolerance is small). Valves that, upon 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: Cost Direct materials Direct labor Variable manufacturing overhead Allocated fixed overhead Casting $ 250 140 180 100 $ 670 1. Estimated annual manufacturing cost savings 2. Annual financing cost savings Finishing $11 150 180 110. $ 451 $ Inspection $0 40 35 135 $ 210 Packing $9 The company, spurred by intense price pressures from foreign manufacturers, recently initiated a number of quality programs. As a result, the rejection rate for valves has decreased from 7.9% to 6.4% of annual output (equal in total to 18,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $590,000 to $345,000. Destin estimates that the annual financing cost associated with inventory holdings is 10%. 23,000 40 35 105 $189 Required: 1. What are the estimated manufacturing cost savings per year associated with the reduction in rework costs? 2. What are the annual financing cost savings associated with the reduction in inventory holdings? 3. Provide a dollar estimate of the total annual cost savings associated with the recently enacted quality improvements. (Do not round intermediate calculations.) Total $ 270 370 430 450 ZLERLE $ 1,520

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter1: Introduction To Cost Management
Section: Chapter Questions
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Destin Company produces water control valves, made of brass, that it sells primarily to builders for use in commercial real estate construction. These valves must meet rigid specifications (i.e., the quality tolerance is small). Valves that, upon 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: Cost Direct materials. Direct labor Variable manufacturing overhead Allocated fixed overhead Casting $ 250 140 180 100 $ 670 1. Estimated annual manufacturing cost savings 2. Annual financing cost savings Finishing $11 150 180 110 $ 451 $ Inspection $0 40 35 135 $ 210 The company, spurred by intense price pressures from foreign manufacturers, recently initiated a number of quality programs. As a result, the rejection rate for valves has decreased from 7.9% to 6.4% of annual output (equal in total to 18,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $590,000 to $345,000. Destin estimates that the annual financing cost associated with inventory holdings is 10%. 23,000 Packing $9 40 35 105 $189 Required: 1. What are the estimated manufacturing cost savings per year associated with the reduction in rework costs? 2. What are the annual financing cost savings associated with the reduction in inventory holdings? 3. Provide a dollar estimate of the total annual cost savings associated with the recently enacted quality improvements. (Do not round intermediate calculations.) Total $ 270 370 430 450 $ 1,520
Transcribed Image Text:Destin Company produces water control valves, made of brass, that it sells primarily to builders for use in commercial real estate construction. These valves must meet rigid specifications (i.e., the quality tolerance is small). Valves that, upon 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: Cost Direct materials. Direct labor Variable manufacturing overhead Allocated fixed overhead Casting $ 250 140 180 100 $ 670 1. Estimated annual manufacturing cost savings 2. Annual financing cost savings Finishing $11 150 180 110 $ 451 $ Inspection $0 40 35 135 $ 210 The company, spurred by intense price pressures from foreign manufacturers, recently initiated a number of quality programs. As a result, the rejection rate for valves has decreased from 7.9% to 6.4% of annual output (equal in total to 18,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $590,000 to $345,000. Destin estimates that the annual financing cost associated with inventory holdings is 10%. 23,000 Packing $9 40 35 105 $189 Required: 1. What are the estimated manufacturing cost savings per year associated with the reduction in rework costs? 2. What are the annual financing cost savings associated with the reduction in inventory holdings? 3. Provide a dollar estimate of the total annual cost savings associated with the recently enacted quality improvements. (Do not round intermediate calculations.) Total $ 270 370 430 450 $ 1,520
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