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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 Direct materials Direct labor Variable manufacturing overhead Allocated fixed overhead ITTII Casting $ 250 135 150 95 Finishing $ 15 145 175 105 Inspection 20 20 65 Packing $ 10 20 20 35 Total $ 275 320 365 300 $ 630 $ 440 $ 105 $ 85 $ 1, 260 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 5.1% to 3.9% of annual output (equal in total to 20,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $450,000 to $275,000. 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.

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 Direct materials Direct labor Variable manufacturing overhead Allocated fixed overhead ITTII Casting $ 250 135 150 95 Finishing $ 15 145 175 105 Inspection 20 20 65 Packing $ 10 20 20 35 Total $ 275 320 365 300 $ 630 $ 440 $ 105 $ 85 $ 1, 260 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 5.1% to 3.9% of annual output (equal in total to 20,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $450,000 to $275,000. 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.

FINANCIAL ACCOUNTING
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: Skipped Cost Direct materials Direct labor Variable manufacturing overhead Allocated fixed overhead Casting $ 250 135 Finishing $ 15 145 175 105 Inspection $ 0 20 Packing $ 10 20 20 35 Total $ 275 320 365 300 150 95 20 65 $630 $ 440 $105 $ 85 $ 1,260 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 5.1% to 3.9% of annual output (equal in total to 20,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $450,000 to $275,000. 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 4.
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: Skipped Cost Direct materials Direct labor Variable manufacturing overhead Allocated fixed overhead Casting $ 250 135 Finishing $ 15 145 175 105 Inspection $ 0 20 Packing $ 10 20 20 35 Total $ 275 320 365 300 150 95 20 65 $630 $ 440 $105 $ 85 $ 1,260 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 5.1% to 3.9% of annual output (equal in total to 20,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $450,000 to $275,000. 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 4.
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