[jlondon]

Here’s a MCQ from Wiley test bank… and I’m not quite understanding it… (my questions are in parenthesis with an <– )

A manufacturing company’s primary goals include product quality and customer satisfaction. The company sells a product, for which the market demand is strong, for $50 per unit. Due to the capacity constraints in the Production Department, only 300,000 units can be produced per year. The current defective rate is 12% (i.e., of the 300,000 units produced, only 264,000 units are sold and 36,000 units are scrapped). There is no revenue recovery when defective units are scrapped. The full manufacturing cost of a unit is $29.50, including

Direct Material $17.50

Direct Labor $4.00

Fixed Manufacturing overhead $8.00

The company’s designers have estimated that the defective rate can be reduced to 2% by using a different direct material. However, this will increase the direct material cost by $2.50 per unit to $20 per unit. The net benefit of using the new material to manufacture the product would be

Answer Choice :

$(120,000)

$120,000

$750,000

$1,425,000

Explanation:

Supporting calculations

Original:

Units produced $300,000

Good units (88%) 264,000

Revenue

264,000 × $50 13,200,000

Production department costs

264,000 × $29.50 ( <– Why is this not taken into consideration as one of the expenses?)

264,000 × $21.50 ( <– Why is this not taken into consideration as one of the expenses?)

300,000 × $21.50 (6,450,000) (<– How come only this is taken into consideration for comparing the cost?)

Margin 6,750,000

New material:

Units produced 300,000

Good units (98%) 294,000

Revenue

294,000 × $50 14,700,000

Production department costs

294,000 × $29.50

300,000 × $21.50 (6,450,000) (<– Why is only this amount taken into consideration for comparing and not the rest?)

300,000 × $ 2.50

294,000 × $21.50

294,000 × $ 2.50

30,000 × $ 2.50

Margin 7,500,000

Increase (decrease) $750,000

BEC: 69, 57, 72, 73, (anticipated for 4/4/2015)
AUD: 65, 63, 74, 84!!! (expires 7/31/2015)
FAR: 63, 57, (scheduled for 4/1/2015)
REG: ... 42, (Anticipated to be around 5/20~)

-Every Set Back is a Set Up for a Major Come Back #motivation

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed." - Michael Jordan

"You are not your past, but the resources and capabilities you glean from it" -Jordan Belfort

[taxman89]

For me, the key to these problems is not over complicating things because then i usually end up with the wrong answer. So here it goes:

with old material

264,000 units X 50 = 13,200,000 sales (remember to use 264k because no one cares about the units that spoiled…we get no income from those)

300,000 units X 29.50 = 8,850,000 total costs

total profit = 4,350,000

With new material

294,000 units X 50 =14,700,000 (294K since we have less spoiled units

300,000 units x 32 = 9,600,000 (still 300k because we have to pay for all units even if they spoil. also have the increase in material costs)

Total profit = 5,100,000

new – old

5,100,000 – 4,350,000 = 750,000 increased profit.

AUD - 75
BEC - 77
FAR - 78
REG - 82

AUD: 61-67-75 (Thanks ninja aud)
BEC: 77
FAR: 78
REG:69-73-70-82

Aud-75 3x I knew i never liked you
Bec-77 1x being in the bubble is stressful
Reg-82 4x its not me its you...and no we cant be friends
Far-78 1x easiest section

[taxman89]

For me, the key to these problems is not over complicating things because then i usually end up with the wrong answer. So here it goes:

with old material

264,000 units X 50 = 13,200,000 sales (remember to use 264k because no one cares about the units that spoiled…we get no income from those)

300,000 units X 29.50 = 8,850,000 total costs

total profit = 4,350,000

With new material

294,000 units X 50 =14,700,000 (294K since we have less spoiled units

300,000 units x 32 = 9,600,000 (still 300k because we have to pay for all units even if they spoil. also have the increase in material costs)

Total profit = 5,100,000

new – old

5,100,000 – 4,350,000 = 750,000 increased profit.

AUD - 75
BEC - 77
FAR - 78
REG - 82

AUD: 61-67-75 (Thanks ninja aud)
BEC: 77
FAR: 78
REG:69-73-70-82

Aud-75 3x I knew i never liked you
Bec-77 1x being in the bubble is stressful
Reg-82 4x its not me its you...and no we cant be friends
Far-78 1x easiest section

[taxman89]

I think for when they worked out their problem they used the 21.50 was to take out the fixed overhead. In this problem it doesnt change the outcome because the units produced are the same. However if you produced different amounts of units in the 2 different scenarios you would need to take that into account with the fixed overhead since it is given to you in a per unit amount not as a straight dollar amount. Like i said, it doesnt matter in the problem because production was 300k units in both scenarios but that is prolly where they were getting their numbers

AUD - 75
BEC - 77
FAR - 78
REG - 82

AUD: 61-67-75 (Thanks ninja aud)
BEC: 77
FAR: 78
REG:69-73-70-82

Aud-75 3x I knew i never liked you
Bec-77 1x being in the bubble is stressful
Reg-82 4x its not me its you...and no we cant be friends
Far-78 1x easiest section

[taxman89]

I think for when they worked out their problem they used the 21.50 was to take out the fixed overhead. In this problem it doesnt change the outcome because the units produced are the same. However if you produced different amounts of units in the 2 different scenarios you would need to take that into account with the fixed overhead since it is given to you in a per unit amount not as a straight dollar amount. Like i said, it doesnt matter in the problem because production was 300k units in both scenarios but that is prolly where they were getting their numbers

AUD - 75
BEC - 77
FAR - 78
REG - 82

AUD: 61-67-75 (Thanks ninja aud)
BEC: 77
FAR: 78
REG:69-73-70-82

Aud-75 3x I knew i never liked you
Bec-77 1x being in the bubble is stressful
Reg-82 4x its not me its you...and no we cant be friends
Far-78 1x easiest section

[jlondon]

@taxman89 your answer explanation is much more better than the wiley test bank one…. I was so confused with all those numbers they put in the answer bank.

BEC: 69, 57, 72, 73, (anticipated for 4/4/2015)
AUD: 65, 63, 74, 84!!! (expires 7/31/2015)
FAR: 63, 57, (scheduled for 4/1/2015)
REG: ... 42, (Anticipated to be around 5/20~)

-Every Set Back is a Set Up for a Major Come Back #motivation

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed." - Michael Jordan

"You are not your past, but the resources and capabilities you glean from it" -Jordan Belfort

[jlondon]

@taxman89 your answer explanation is much more better than the wiley test bank one…. I was so confused with all those numbers they put in the answer bank.

BEC: 69, 57, 72, 73, (anticipated for 4/4/2015)
AUD: 65, 63, 74, 84!!! (expires 7/31/2015)
FAR: 63, 57, (scheduled for 4/1/2015)
REG: ... 42, (Anticipated to be around 5/20~)

-Every Set Back is a Set Up for a Major Come Back #motivation

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed." - Michael Jordan

"You are not your past, but the resources and capabilities you glean from it" -Jordan Belfort

[Author]

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