Question

The production department of Zan Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Units to be produced 9,000 12,000 11,000 10,000
In addition, 15,750 grams of raw materials inventory is on hand at the start of the 1st Quarter and the beginning accounts payable for the 1st Quarter is $5,600.

Each unit requires 7 grams of raw material that costs $1.20 per gram. Management desires to end each quarter with an inventory of raw materials equal to 25% of the following quarter’s production needs. The desired ending inventory for the 4th Quarter is 8,000 grams. Management plans to pay for 60% of raw material purchases in the quarter acquired and 40% in the following quarter. Each unit requires 0.20 direct labor-hours and direct laborers are paid $15.50 per hour.

Required:

1.&2. Calculate the estimated grams of raw material that need to be purchased and the cost of raw material purchases for each quarter and for the year as a whole.

3. Calculate the expected cash disbursements for purchases of materials for each quarter and for the year as a whole.

4. Calculate the estimated direct labor cost for each quarter and for the year as a whole. Assume that the direct labor workforce is adjusted each quarter to match the number of hours required to produce the estimated number of units produced.

Answer 1

The best production method with labor costing $100/unit is Method 1 at a total cost of $9000. When labor costs increase to $200/unit, Method 1 is still the most cost-effective with a total cost of $14000.

Step-by-step explanation:

To decide on the most cost-effective production method, we need to calculate the total cost for each method using different labor costs. This involves multiplying the number of labor units required by the cost of labor, and the number of capital units required by the cost of capital, then summing these two amounts. For the scenario where labor costs $100/unit and capital costs $400/unit:

• Method 1: (50 units of labor × $100/unit) + (10 units of capital × $400/unit)
• = $5000 + $4000 = $9000
• Method 2: (20 units of labor × $100/unit) + (40 units of capital × $400/unit)
• = $2000 + $16000 = $18000
• Method 3: (10 units of labor × $100/unit) + (70 units of capital × $400/unit)
• = $1000 + $28000 = $29000

When labor costs increase to $200/unit, the calculations become:

• Method 1: (50 units of labor × $200/unit) + (10 units of capital × $400/unit)
• = $10000 + $4000 = $14000
• Method 2: (20 units of labor × $200/unit) + (40 units of capital × $400/unit)
• = $4000 + $16000 = $20000
• Method 3: (10 units of labor × $200/unit) + (70 units of capital × $400/unit)
• = $2000 + $28000 = $30000

The best production method when labor is $100/unit is Method 1, with the lowest total cost of $9000. If the cost of labor rises to $200/unit, Method 1 remains the most cost-effective, with a total cost of $14000.

Answer 2

1 & 2. Purchases of Raw Material

Purchases in grams Cost

Quarter 1 68,250 $ 81,900

Quarter 2 82,250 $ 98,700

Quarter 3 75,250 $ 90,300

Quarter 4 60,500 $ 72,600

Full year $ 343.500

3. Expected Cash disbursements

Quarter 1 $ 54,740

Quarter 2 $ 91,980

Quarter 3 $ 93.660

Quarter 4 $ 79,680

Total Year payments $ 320,060

4. Total cost of Direct Labor

Quarter 1 $ 27,900

Quarter 2 $ 37,200

Quarter 3 $ 34,100

Quarter 4 $ 31,000

Total Year for direct labor $ 130,200

Step-by-step explanation:

Computation of raw material purchases

Raw material consumption

Qtr No of Units per qtr Total Requirement

1 9,000 * 7 gms per unit = 63,000 gms

2 12,000 * 7 gms per unit = 84,000 gms

3 11,000 * 7 gms per unit = 77,000 gms

4 10,000 * 7 gms per unit = 70,000 gms

Total Year 294,000 gms

Raw Material Purchases for each quarter

Purchases = Closing inventory + Consumption - Opening inventory

1 21,000 (84,000gms * 25 % ) + 63,000 - 15.750 = 68,250 gms

2 19,250 (77,000gms* 25 %) + 84,000 - 21,000 = 82,250 gms

3 17,500 ( 70,000gms* 25 %) + 77,000-19,250 = 75,250 gms

4 8,000 ( As per data) + 70,000-17.500 = 60,500 gms

Total year purchases = = 286,250 gms

Cost of purchases

Quarter 1 68,250 gms * $ 1.20 = $ 81,900

Quarter 2 82,250 gms * $ 1.20 = $ 98,700

Quarter 3 75,250 gms * $ 1,20 = $ 90,300

Quarter 4 60,500 gms * $ 1,20 = $ 72,600

Total purchases $ 343,500

Computation of cash disbursements for purchases

Quarter 1 Payments = Opening Payables + 60 % of quarter 1

$ 5,600 + ( 60 %* $ 81,900) = $ 5,600 + $ 49,140 = $ 54,740

Quarter 2 payments

(40 % of quarter 1) + ( 60 % of quarter 2)

($ 81,900 * 40 %) + ( $ 98,700 * 60 %)

$ 32,760 + $ 59,220 = $ 91,980

Quarter 3 payments

(40 % of quarter 2) + ( 60 % of quarter 3)

($ 98,700 * 40 %) + ( $ 90,300 * 60 %)

$ 39,480 + $ 54,180 = $ 93.660

Quarter 4 payments

(40 % of quarter 3) + ( 60 % of quarter 4)

($ 90,300 * 40 %) + ( $ 72,600 * 60 %)

$ 36,120 + $ 43,560 = $ 79,680

Total payments for purchases for the year $ 320,060

Computation of direct labor cost

No of units * Estimated Direct labor hours * Labor rate per hour

Quarter 1 = 9,000 * 0.20 per unit * $ 15.50 = $ 27.900

Quarter 2 = 12,000 * 0.20 per unit * $ 15.50 = $ 37.200

Quarter 3 11,000 * 0.20 per unit * $ 15.50 = $ 34.100

Quarter 4 10,000 * 0.20 per unit * $ 15.50 = $ 31.000

Total cost for Direct labour $ 130,200