b The total overhead cost incurred by a company producing CN

b) The total overhead cost incurred by a company producing CNC-machine products last year was $12,000,000. This overhead could be divided between administration (rent, design, advertising, human resources, accounts, etc.). general factory overheads (rent, power, supervision), and to CNC machinery that ran 200,000 hours (covers depreciation, maintenance, etc). $3,000,000 of the factory overhead has been identified as fixed costs and $1,000.000 variable. The direct material costs last year were $10,000,000; the direct labour, totalling 150,000 person-hours, cost $4,500.000. A new product (with different material and labour requirements to existing products) is to be introduced to the company\'s product line this year. Engineers have estimated that each unit of this new product will require $4.00 worth of direct material, 10 minutes of a skilled operator\'s time (at a labour rate of S36/hr), and 12 minutes on a CNC-machine tool (unattended operation). (i) (ii) ESTIMATE the factory cost per unit of this new product DETERMINE the price the new product must be sold for to recover all costs and make a 30% profit. If the company is very keen to win new market for this product (iii) CALCULATE the lowest price that should be charged so that a loss is not incurred (i.e. this new product is considered to be additional to the existing product line, and its marginal cost is desired). JUSTIFY the method you have chosen to solve this problem. (iv)

Solution

A Fixed factory Overhead $3,000,000 B Total CNC machine hour 200000 C=A/B Fixed factory overhead recovery rate per machine hour $15 D Variable factory overhead cost $1,000,000 E=D/B Variable overhead recovery rate per machine hour $5 F=C+E Total factory overhead recovery rate per machinehour $20 G Direct labor hours             150,000 Total Overhead $12,000,000 H Overhead other than factory overhead $8,000,000 (12000000-3000000-1000000) I=H/G Recovery rate of Overhead other than factory overhead per labor hour 53.33333333 ESTIMATION OF COST OF NEW PRODUCT: J Unit Direct Material cost $4.00 K Direct labor hour 0.166666667 (10/60) L=36*K Unit direct labor cost $               6.00 M CNC machine tool hour 0.2 (12/60) N=M*20 Applied factory overhead $               4.00 P=J+L+N Factory cost per unit $14.00 Q=K*I Applied overhead other than factory overhead $               8.89 R=P+Q Total Costs $22.89 S=0.3*R Mark up on costs(30%) $6.87 T=R+S Price at which new product to be sold $29.76 Lowest price to be charged to win new market=Marginal cost of the new product All fixed overheads are sunk costs and is not increased for producing new product Marginal cost =Material +Labor+Variable overhead J Material cost per unit of new product $4.00 L Direct labor cost per unit of new product $               6.00 M Machine hour 0.2 E Variable factory overhead rate per machine hour $5 F=M*E Applied variable factory overhead $1 U=J+L+F Marginal cost per unit of new product $11.00 Lowest price to be charged to win market $11.00