Jim Franklin, the operations manager for Tires for Speed, was reviewing the product costs for his company’s performance tires. The current production schedule calls for the tires to be produced in batches of 1,000 tires. Between each batch, the production and packaging lines must be completely cleaned to remove all remnants of rubber before changing to the next batch. Currently, Tires for Speed makes 6 different tire models. Under the company’s activity-based costing system, each batch incurs direct setup and cleaning charges of $500. To reduce costs in the coming year, Jim plans to increase the minimum batch size to 2,000 tires, which will reduce the number of required setups. A total of 80,000 tires are produced each year. Required A.    What effect will Jim’s decision to increase the batch size have on his total    setup costs?    What effect will Jim’s decision to increase the batch size have on the cost of a tire? C.  Suppose two workers are required to run each batch. Each worker is paid $20,000 per year. One worker can be eliminated if the batch size is increased to 2,000 tires, rather than 1,000 tires. Should the batch size be increased?  Explain.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Jim Franklin, the operations manager for Tires for Speed, was reviewing the product costs for his company’s performance tires. The current production schedule calls for the tires to be produced in batches of 1,000 tires. Between each batch, the production and packaging lines must be completely cleaned to remove all remnants of rubber before changing to the next batch.

Currently, Tires for Speed makes 6 different tire models. Under the company’s activity-based costing system, each batch incurs direct setup and cleaning charges of $500. To reduce costs in the coming year, Jim plans to increase the minimum batch size to 2,000 tires, which will reduce the number of required setups. A total of 80,000 tires are produced each year.

Required
A.    What effect will Jim’s decision to increase the batch size have on his total    setup costs?

  1.    What effect will Jim’s decision to increase the batch size have on the cost of a tire?
  2. C.  Suppose two workers are required to run each batch. Each worker is paid $20,000 per year. One worker can be eliminated if the batch size is increased to 2,000 tires, rather than 1,000 tires. Should the batch size be increased?  Explain.
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