The Bone Company has a Research and Development (R&D) building that is shared by three wire and cable groups: High Voltage, Medium Voltage, and Low Voltage. Adjacent to the R&D building is a pilot plant, a small-scale production facility designed for limited runs of experimental and commercial products. The three groups rely on the pilot plant to produce samples of their formulations. In the pilot plant, sample sizes vary from about 1,000 kilograms to 10,000 kilograms. The R&D groups, including the pilot plant, are run as cost centers. The pilot plant also takes on special production runs for external customers that are too small for a regular plant. The pilot plant consists of three combination blending/extruding machines, which produce pellets of compounded material. Unlike large commercial compounding machines, which can operate 24 hours/day, these machines are run for approximately 1,000 hours a year. In the past, the pilot plant has costed its jobs based on direct materials, variable machine time, and allocated overhead. Overhead is allocated by machine time. A single plant-wide machine rate is calculated pooling all three machines. The overhead pool includes plant fixed costs plus the labor cost of the department. Approximately 20 percent of the machine technicians’ time is spent performing general clean-up and maintenance. Before each job, machine time is calculated by a computer program, which outputs feed rate and set-up parameters. Each product is scheduled to a specific machine based on its formulation. The cost schedule of each machine is shown below. Capacity represents the historic annual average capacity:

While formulations vary considerably, 90 percent of the blends are either resin or flame-retardant magnesium hydroxide. These bulky materials are normally ordered one to two weeks ahead of time and take up much of the floor space. The additives are quite standard and are kept in stock. Weigh-ups and general set-up are time consuming and vary from job to job: a formulation that requires seven additives takes considerably more time to prepare than a similar run with two additives. In the past, time spent on set-up was not tracked, but it is a simple matter for the chief operator to include these numbers with the run report. One of the technicians is not assigned to a particular machine but is responsible for arranging stock on the floor. The manager spends most of his time scheduling runs and attending to administrative work. In a typical job, total weigh-up time is the amount of labor time required to locate, prepare, and mix the direct materials prior to inserting them in the machine.

 

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Machine 1 Machine 2 Machine 3 Clean-up (hours/batch) 4 6 8 Capacity (kilograms/year) 250,000 250,000 500,000 Fixed costs: $200,000/year Labor costs: 1 manager @ $45,000/year 6 technicians @ $30,000/year Variable Cost (S/hour) Operators 25 25 50 2 2 1 Machine 1 Machine 2 Machine 3 Clean-up (hours/batch) 4 6 8 Capacity (kilograms/year) 250,000 250,000 500,000 Fixed costs: $200,000/year Labor costs: 1 manager @ $45,000/year 6 technicians @ $30,000/year Variable Cost (S/hour) Operators 25 25 50 2 2 1

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a The cost of the sample run would be calculated as follows ... View the full answer