Question

Power Cycle​ Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells. The following estimates have been prepared to evaluate the benefits from the​ reorganization: Before the change After the change Total annual sales ​$1,200,000 ​$1,600,000 Costs as percentage of​ sales: Direct materials ​ 23% ​ 20% Direct labor ​ 9% ​ 7% Manufacturing Support costs ​ 18% ​ 13% Workminus Minus Process inventory ​ $250,000 ​ $180,000 Inventory carrying costs are estimated to be​ 10% per year. As a result of the layout​ reorganization, incremental manufacturing costs are projected​ to:

Answer 1

$40,000 increase

Step-by-step explanation:

Note: The data in the question are merged together and they are first sorted before answering the question as follows:

Before the change After the change

Total annual sales ​ $1,200,000 ​ $1,600,000

Costs as percentage of​ sales:

Direct materials ​ 23% ​ 20%

Direct labor ​ 9% ​ 7%

Manufacturing Support costs ​ 18% ​ 13%

Now, the explanation to the answer is as follows:

Direct materials before = $1,200,000 * 23% = $276,000

Direct labor before = $1,200,000 * 9% = $108,000

Manufacturing support costs before = $1,200,000 * 18% = $216,000

Total cost before the change = $600,000

Direct materials after = $1,600,000 * 20% = $320,000

Direct labor before = $1,600,000 * 7% = $112,000

Manufacturing support costs before = $1,600,000 * 13% = $208,000

Total cost after the change = $640,000

Incremental manufacturing costs = Total cost after the change - Total cost before the change = $640,000 - $600,000 = $40,000 increase