1.Harcourt Ltd undertakes a range of work, including making security cabinets on a made to measure basis. The following costs are expected to be incurred by the company during the next month:
Indirect Labour cost $25,000
Direct Labour time 4,000 hours
Depreciation (wear and tear) of machinery $8,500
Rent and Rates $14,000
*Direct labour costs $122,000
Utilities costs $5,000
Machine time 2,000 hours
Indirect Materials $1,500
Other miscellaneous indirect costs $1000 Direct materials cost $28,000
- All direct labour is paid at the same hourly
The company has received an inquiry about a special order of cabinets. It is estimated that the order will take 22 direct labour hours to make and will require 32 square metres of steel which costs $98 per square metre.
Required:
- What is the full cost of making the special order of cabinets if the company uses a direct labour hour basis of charging overheads to individual jobs?
- What is the full cost of making the special order of cabinets if the company uses a machine hour basis of charging overheads and if it is expected to take 12 machine hours (as well as 22 direct labour hours)?
- Which one of these two costs for this order is the correct one or simply the better one and why? Discuss 2 reasons for your answer evaluating each method
- What other method of costing, other than full cost, might the business consider using and why?
Do you think Harcourts should agree to undertake the special order and why (give 2 reasons). What other information would you need to make this decision? (list two things).
2.Harcourt Ltd also makes lifting hoists. They currently outsource the production of parts to an Australian based supplier and do all the assembly in house. The fixed costs of operating their workshop for a month total $5500. Each hoist requires parts which cost $395 and takes 5 hours to assemble. Assembly line staff are all contract staff and are paid $40 per hour. The hoists are sold for $1000 each. Currently Harcourt Ltd sells 130 hoists per month.
The managers are considering hiring a machine that will in fact make the parts required. Using the machine would reduce materials cost to $200 and assembly time to 4 hours but increase fixed costs to $28000.
Required:
- Calculate the breakeven point in units and in sales $s if Harcourt Ltd continues to (i) outsource parts from an external
- Calculate the breakeven point in units and sales $s if the company (ii) hires a machine to make the
- For each of the scenarios (i) and (ii) estimate the profit for the
- Calculate the margin of safety for each of scenarios (i) and (ii
- On the basis of the calculations in a, b, c, and d, and considering operating gearing, which option do you think is best and why?
- List four factors other than those that are financially quantifiable would you consider when making the
- The manager of production has come to you with two suggestions going forward. He wants to continue to outsource the parts but from a firm based in China in order to reduce the cost from $395 to $300 per unit and employ more qualified assemblers by paying $50 per hour which would reduce assembly time to 4 hours. He thinks his suggestions will allow us to reduce the price of the hoists to $800 as a result of cheaper parts, improve the quality of the product with more skilful assemblers and allow us to increase sales to 145 per month. Would you take his advice? Explain in terms of both quantifiable and qualitative
