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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 Casting Direct materials $ 280 Finishing $ 10 Inspection $ 0 Packing $ 10 Total $ 300 Direct labor 150 160 35 35 380 Variable manufacturing overhead Allocated fixed overhead 180 190 35 35 440 110 $ 720 120 $ 480 80 50 360 $ 150 $ 130 $ 1,480 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 5.7% to 4.5% of annual output (equal in total to 14,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $480,000 to $290,000. Destin estimates that the annual financing cost associated with inventory holdings is 11%. 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.) 1. Estimated annual manufacturing cost savings 2. Annual financing cost savings 3. Total estimated savings

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 Casting Direct materials $ 280 Finishing $ 10 Inspection $ 0 Packing $ 10 Total $ 300 Direct labor 150 160 35 35 380 Variable manufacturing overhead Allocated fixed overhead 180 190 35 35 440 110 $ 720 120 $ 480 80 50 360 $ 150 $ 130 $ 1,480 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 5.7% to 4.5% of annual output (equal in total to 14,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $480,000 to $290,000. Destin estimates that the annual financing cost associated with inventory holdings is 11%. 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.) 1. Estimated annual manufacturing cost savings 2. Annual financing cost savings 3. Total estimated savings

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
Chapter19: Capital Investment
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 Casting Direct materials $ 280 Finishing $ 10 Inspection $ 0 Packing $ 10 Total $ 300 Direct labor 150 160 35 35 380 Variable manufacturing overhead Allocated fixed overhead 180 190 35 35 440 110 $ 720 120 $ 480 80 50 360 $ 150 $ 130 $ 1,480 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 5.7% to 4.5% of annual output (equal in total to 14,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $480,000 to $290,000. Destin estimates that the annual financing cost associated with inventory holdings is 11%. 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.) 1. Estimated annual manufacturing cost savings 2. Annual financing cost savings 3. Total estimated savings
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 Casting Direct materials $ 280 Finishing $ 10 Inspection $ 0 Packing $ 10 Total $ 300 Direct labor 150 160 35 35 380 Variable manufacturing overhead Allocated fixed overhead 180 190 35 35 440 110 $ 720 120 $ 480 80 50 360 $ 150 $ 130 $ 1,480 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 5.7% to 4.5% of annual output (equal in total to 14,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $480,000 to $290,000. Destin estimates that the annual financing cost associated with inventory holdings is 11%. 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.) 1. Estimated annual manufacturing cost savings 2. Annual financing cost savings 3. Total estimated savings
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