Kim’s Kimchi Products, Inc. has automated much of its production of specialized kimchi and Korean appetizers. Machines are utilized in many areas of production and most of the labor time is spent in monitoring and testing for quality. Labor cost is, to a large extent, on a salary basis and is now included as indirect labor cost.
There is still some direct labor cost. However, the fixed overhead cost (that now includes what was once classified as direct labor) is a predominant part of total product cost.
The materials cost per unit of kimchi is $12, and the direct labor cost is $2.50 per machine hour. Variable overhead costs (per machine hour) have been budgeted as follows.
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Per Machine Hour |
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Supplies and Other Indirect Materials |
$0.60 |
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Power |
$0.60 |
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Repairs and Maintenance of Equipment |
$0.40 |
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Total Unit Cost Per Machine Hour |
$1.60 |
The fixed factory overhead has been budgeted for the year as follows.
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Factory supervision |
$ 47,500 |
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Indirect labor |
156,000 |
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Payroll taxes and fringe benefits |
27,800 |
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Supplies and other indirect materials |
16,200 |
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Power |
33,000 |
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Heat and light |
18,500 |
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Repairs and maintenance of equipment |
36,700 |
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Repairs and maintenance of plant |
8,400 |
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Taxes and insurance |
6,800 |
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Telephone |
4,300 |
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Miscellaneous factory overhead |
1,200 |
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Depreciation |
63,600 |
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TOTAL FIXED OVERHEAD |
$420,000 |
The president of the company, Mr. Brian Aday, observes, “With such relatively high fixed overhead cost, it is imperative that we operate at a high volume level to absorb the cost.”
The company manufactures 10 units of kimchi per machine hour, and little can be done to improve this rate of production. Attempts will be made to reduce fixed overhead, but the budget is already tight.
Normal machine hours for the year have been established at 40,000. The immediate goal is to operate at 75,000 machine hours per year.
Required:
(1) Compute the product unit cost at a 40,000 machine hour level. (Show variable overhead costs and fixed overhead costs separately.)
(2) Compute the product unit cost at a 75,000 machine hour level. (Show variable overhead costs and fixed overhead costs separately.)
(3) How much can unit cost be reduced by increasing production (and sales) by 50 percent, as represented by the 50 percent increase in machine hours?
(4) Assuming the selling price of kimchi is $14.00 per unit, compute a profit and loss statement for both scenarios (40,000 and 75,000 machine hours).
Answer format:
Kim’s Kimchi Products, Inc. Case Study Set-up
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Machine Hours |
40,000 |
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Material Cost per Unit |
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Direct Labor per Hour |
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Product per Hour (Unit) |
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UVC per Hour |
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VC per Unit |
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Total Fixed Overhead |
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Fixed Cost per Machine Hour |
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Fixed Cost Per Unit |
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Machine Hours |
75,000 |
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Material Cost per Unit |
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Direct Labor per Hour |
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Product per Hour (Unit) |
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UVC per Hour |
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VC per Unit |
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Total Fixed Overhead |
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Fixed Cost per Machine Hour |
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Fixed Cost Per Unit |
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ANSWER TO |
Q1 |
Q2 |
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Cost per Unit: |
40,000 MH |
75,000 MH |
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Materials |
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Labor |
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Variable Overhead |
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Fixed Overhead |
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Total Unit Costs |
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ANSWER TO QUESTION 3: |
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Unit Costs at 40,000 Machine Hours |
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Unit Costs at 75,000 Machine Hours |
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COST REDUCTION OF |
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ANSWER TO QUESTION 4: |
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40,000 MH |
75,000 MH |
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Unit Sales |
600,000 |
900,000 |
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Unit Selling Price |
$14.00 |
$14.00 |
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Sales |
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Direct Materials |
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Direct Labor |
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Variable Overhead |
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Fixed Overhead |
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Total Costs |
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Profit |
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Operating Margin |
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