Ehrling, Inc., manufactures metal racks for hanging clothing in retail stores. Ehrling was approached by the CEO
Question:
Expansion of activity capacity for setups, inspection, and machining must be done in steps. For setups, each step provides an additional 20 hours of setup activity and costs $3,000. For inspection, activity capacity is expanded by 2,000 hours per year, and the cost is $20,000 per year (the salary for an additional inspector). Machine capacity can be leased for a year at a rate of $40 per machine hour. Machine capacity must be acquired, however, in steps of 1,500 machine hours.
Required:
1. Compute the change in income for Ehrling, Inc., if the order is accepted.
2. Does the order require any change in capacity for setups, packing, or machining?
3. Suppose that the packing activity can be eliminated for this order since the customer is in town and does not need to have the racks boxed and shipped. Because of this, direct materials can be reduced by $13 per unit, and direct labor can be reduced by 0.5 hour per unit. How is the analysis affected?
4. Ehrling can find no other cost-saving measures for this special order. Why might the company decide to accept it even if it shows a loss?
Step by Step Answer:
Cornerstones of Cost Management
ISBN: 978-1111824402
2nd edition
Authors: Don R. Hansen, Maryanne M. Mowen