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 Finishing Inspection Packing Total Direct materials $ 260 $ 10 $ 0 $ 10 $ 280 Direct labor 145 155 45 45 390 Variable manufacturing overhead 190 185 40 40 455 Allocated fixed overhead 105 115 140 110 470 $ 700 $ 465 $ 225 $ 205 $ 1,595 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 8.1% to 5.9% of annual output (equal in total to 19,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $600,000 to $350,000. Destin estimates that the annual financing cost associated with inventory holdings is 11%. Required: What are the estimated manufacturing cost savings per year associated with the reduction in rework costs? What are the annual financing cost savings associated with the reduction in inventory holdings? Provide a dollar estimate of the total annual cost savings associated with the recently enacted quality improvements. Note: Do not round intermediate calculations.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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	Finishing	Inspection	Packing	Total
Direct materials	$ 260	$ 10	$ 0	$ 10	$ 280
Direct labor	145	155	45	45	390
Variable manufacturing overhead	190	185	40	40	455
Allocated fixed overhead	105	115	140	110	470
	$ 700	$ 465	$ 225	$ 205	$ 1,595

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 8.1% to 5.9% of annual output (equal in total to 19,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $600,000 to $350,000. Destin estimates that the annual financing cost associated with inventory holdings is 11%.

Required:

What are the estimated manufacturing cost savings per year associated with the reduction in rework costs?
What are the annual financing cost savings associated with the reduction in inventory holdings?
Provide a dollar estimate of the total annual cost savings associated with the recently enacted quality improvements.

Note: Do not round intermediate calculations.

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