the metal chassis was sheared to size by a metal distributing company hour (variable). A subcontractor will mold the plastic unit, and minor additional processing will be required at Tan Toy. The raw material for State any 12. The Tan Toy Company is a medium-sized manufacturer of toys. Its engineering department aggressively seeks product cost reductions through redesign (often referred to as value engineering). One attractive opportunity is to substitute a molded plastic chassis (frame) for the present fabricated sheet-metal chassis on a particular toy. The engineering department has proven the technical feasibility of the substitution and, in order to make and test prototypes, earlier acquired for $10,000 the tooling required for the molded-plastic chassis. Here are comparative full- absorption manufacturing cost data (per unit):

The plastic unit requires 0.02 hour of labor, while the metal unit requires 0.12 hour. Estimated annual usage is 12,500 units. The overhead rates are $8.92 per direct labor hour (full absorption) and $2.75 per direct labor and then punched, formed, and finished at Tan. The 0.12 hour of processing labor is represented by these activities: 

han 0.06 hour for punching 

0.04 hour for forming 

0.02 hour for finishing 

a. Should the substitution be made? 

b. Assume the following existing inventories (related only to the metal unit): 

The work-in-process units have been punched but not formed or finished. The scrap value of the metal parts is about 5 cents per unit. When should the substitution be effected?

Transcribed Image Text:

Plastic Metal $0.88 0.13 0.18 $1.19 $10,000 $0.41 0.75 1.07 $2.23 Material Labor Overhead Total Tooling Fully depreciated Plastic Metal $0.88 0.13 0.18 $1.19 $10,000 $0.41 0.75 1.07 $2.23 Material Labor Overhead Total Tooling Fully depreciated