T&j Manufacturing
Essay by Alex Nguyen • March 22, 2018 • Case Study • 3,571 Words (15 Pages) • 877 Views
Introduction:
T&J Manufacturing has the factory that produces custom kitchen cabinets. In this MEMO, we want to update the performance of the production line and present the potential changes and improvements for this production line.[a]
Here are some fundamentals[b]. Customer kitchen cabinets averagely consume $1000 wood material and other direct material of $200 for each job. Averagely each job requires 20 labor hours at a rate of $10 per hour. We are expecting about 800 units can be sold in a year. [c]
Manufacturing cost estimation:
Table 1. shows the break-down of all manufacturing related costs.
Manufacturing Cost Break-down
Item | Cost |
Salaries for factory personal[d] | $ 220,000.00 |
Factory Rent | $ 20,000.00 |
Depreciation for factory equipment | $ 70,000.00 |
Factory Property taxes | $ 10,000.00 |
Maintenance for factory equipment | $ 80,000.00 |
Total Manufacturing OH | $ 400,000.00 |
Total Direct Labor(hrs) | 16,000 |
MOH per D/L hr | $ 25.00 |
Direct material | $ 1,200.00 |
Direct labor | $ 200.00 |
MOH per job | $ 500.00 |
Total Manufacturing cost per unit | $ 1,900.00 |
Table 1. Custom Kitchen Cabinet Manufacturing Cost Break-down
The cost structure shows the direct cost contributes 74% and the manufacturing overhead contributes 26%. Direct cost is still dominant. Currently, since no other production line is considered in this analysis. The MOH allocation should be identical for different activity base. For example, we can use machine time as the activity base, or real estate of the production area as the activity base. If we start considering other production lines, these two activities will drive the fixed cost depreciation of the equipment and factory property tax. It will change the allocation percentage between different production lines. Since in this analysis, we focus on the single production line, the allocation will be identical no matter what activity base or how many activity bases are selected. [e]
The selling price is set for 65% mark up from the total manufacturing cost. Therefore, the average unit price will be at $3,135 based on the cost analysis above (see Schedule A for detailed analysis).
Total operating cost analysis:
Table 2 shows the break-down of the estimated yearly operating cost. They are grouped into variable cost and fixed cost.
Operating Cost Analysis
Variable Cost: | Per Job | Total |
Direct Material | $1,200.00 | $ 960,000.00 |
Direct Labor | $ 200.00 | $ 160,000.00 |
Office Utilities and Misc office expenses(based on units sold) | $ 25.00 | $ 20,000.00 |
Sales Travel | $ 30.00 | $ 24,000.00 |
Sales commissions | $ 56.25 | $ 45,000.00 |
Total Variable Cost | $ 1,511.25 | $1,209,000.00 |
Fixed Cost: | Per Job | Total |
Salaries for factory personal[f] | $220,000.00 | |
Depreciation for factory equipment | $70,000.00 | |
Factory Rent | $20,000.00 | |
Maintenance for factory equipment: | $80,000.00 | |
Factory Property taxes: | $10,000.00 | |
Salaries- office & administrative | $520,000.00 | |
Insurance-Office | $12,000.00 | |
Office Rent | $125,000.00 | |
Depreciation - office equipment | $40,000.00 | |
Advertising | $20,000.00 | |
Total Fixed Cost | $1,117,000.00 | |
Total Cost | $2,326,000.00 |
Table 2. Operating cost break-down
Because the production line is still at the early stage of the product life cycle, the sales travel expense is still linear to the volume of the sales. We expect the relation to change[g], when the volume doubles from where we are now. Eventually the travel expense will become a periodic cost. The office misc. expense currently is mainly from products related documentation. Therefore, it is also proportional to the sales volume. It is also expected to change to a periodic cost when the volume goes up.
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