Question

Elliott, Inc., has four salaried clerks to process purchase orders. Each clerk is paid a salary of $25,750 and is capable of processing as many as 6,500 purchase orders per year. Each clerk uses a PC and laser printer in processing orders. Time available on each PC system is sufficient to process 6,500 orders per year. The cost of each PC system is $1,100 per year. In addition to the salaries, Elliott spends $27,560 for forms, postage, and other supplies (assuming 26,000 purchase orders are processed). During the year, 25,350 orders were processed.1. Classify the resources associated with purchasing as (1) flexible or (2) committed.

2. Compute the total activity availability, and break this into activity usage and unused activity.

3. Calculate the total cost of resources supplied (activity cost), and break this into the cost of activity used and the cost of unused activity.

4. (a) Suppose that a large special order will cause an additional 500 purchase orders. What purchasing costs are relevant? By how much will purchasing costs increase if the order is accepted? (b) Suppose that the special order causes 700 additional purchases orders. How will your answer to (a) change?

Answer 1

See the explanation for the answers.

Step-by-step explanation:

Given Data:

Activity availability = 26,000 purchase orders

Activity usage: 25,350 purchase orders

Cost of each PC system = $1,100 per year

Clerk salary = $25,750

Cost of supplies = $27,560

1.

Forms, Postage and supplies resources associated with purchasing can be classified as flexible resources.

2.

Activity availability 26,000 purchase orders

Activity usage: 25,350 purchase orders

Unused activity 650 purchase orders

3.)

Activity cost $122,271

Cost of activity used $119,886

Cost of unused activity $2385

Working Notes:

1. Unused activity = Activity availability - activity usage

= 26,000 - 25350

= 650

2. Activity cost = 4*(clerk salary+cost of each PC) +

(cost of supplies*activity usage/activity availability)

= 4(22,750+1,100)+(27,560*25,350/26,000)

= 95400 + 26871

= 122,271

3. Cost of unused activity = 4*(clerk salary+cost of PC)* (unused activity/

= 4(22,750+1,100)*(650/26,000)

= 95400 * 0.025

= 2385

4a. Forms, postage and other supplies are relevant. There will be increase in purchasing cost.

4b) 700 additional purchase will exceed the capacity of 26000 purchase order. This will increase both flexible and committed order.

Answer 2

Purchasing resources which can be classed as flexible : FORMS, POSTAGE, SUPPLIES

Purchasing resources which can be classed as committed : PC systems, Clerks

2.)

Total Activity availability = 26,000 purchased orders

Activity usage = 25,350 purchased orders

Unsed activity usage = (26000 - 25350) = 650 purchased orders

Activity cost = (25750 ×4) +(1100 ×4) +((27560/26000)×25350) = $134,271

Cost of activity used = Activity cost x Activity usage/Activity availability

134,271 x (25,350/26,000) = $130,914

Cost of unused activity = Activity cost x unused activity/Activity availability

134,271 x 650/26,000 = $3,357

4.) if purchase order increases by 500, total activity cost will remain unchanged and no additional purchase will need to be made

Activity usage = 25,850

Unusued activity = 150

Activity cost = 134,271

Cost of used activity = 134,271 ×(25850/26000) = 133,496.36

Cost of unused activity = 134271×(150/26000) = 774.64

4b) If purchase order increases by 700, total activity cost will increase as purchase order to be processed will become 26,050, therefore additional 50 purchase order on forms, postage and other supplies will need to be made

Extra cost = 50 ×(27560/26000) = $53

Step-by-step explanation:

2.)

Total Activity availability = 26,000 purchased orders

Activity usage = 25,350 purchased orders

Unsed activity usage = 650 purchased orders

3.)

Activity cost = (25750 ×4) +(1100 ×4) +((27560/26000)×25350) = $134,271

Cost of activity used = Activity cost x Activity usage/Activity availability

134,271 x (25,350/26,000) = $130,914

Cost of unused activity = Activity cost x unused activity/Activity availability

134,271 x 650/26,000 = $3,357

4.) if purchase order increases by 500

Total Activity cost will remain unchanged

Activity usage = 25,850

Unusued activity = 150

Activity cost = 134,271

Cost of used activity = 134,271 ×(25850/26000) = 133,496.36

Cost of unused activity = 134271×(150/26000) = 774.64

4b) If purchase order increases by 700, total activity cost will increase as purchase order to be processed will become 26,050, therefore additional 50 purchase order on forms, postage and other supplies will need to be made

Extra cost = 50 ×(27560/26000) = $53