Destin Company produces water control valves, made of brass, that it sells primarily to builders for use in commercial real estateconstruction. These valves must meet rigid specifications (i.e., the quality tolerance is small). Valves that, upon inspection, get rejectedare returned to the Casting Department; that is, they are returned to stage 1 of the four-stage manufacturing process. Rejected itemsare melted and then recast. As such, no new materials in Casting are required to rework these items. However, new materials must beadded in the Finishing Department for all reworked valves. As the cost accountant for the company, you have prepared the followingcost data regarding the production of a typical valve:SkippedCostDirect materialsDirect laborVariable manufacturing overheadAllocated fixed overheadCasting$ 250135Finishing$ 15145175105Inspection$ 020Packing$ 10202035Total$ 275320365300150952065$630$ 440$105$ 85$ 1,260The company, spurred by intense price pressures from foreign manufacturers, recently initiated a number of quality programs. As aresult, the rejection rate for valves has decreased from 5.1% to 3.9% of annual output (equal in total to 20,000 units). The reduction inreject rates has enabled the company to reduce its inventory holdings from $450,000 to $275,000. Destin estimates that the annualfinancing cost associated with inventory holdings is 11%.Required:1. What are the estimated manufacturing cost savings per year associated with the reduction in rework costs?2. What are the annual financing cost savings associated with the reduction in inventory holdings?3. Provide a dollar estimate of the total annual cost savings associated with the recently enacted quality improvements.(Do not round intermediate calculations.)1. Estimated annual manufacturing cost savings2. Annual financing cost savings3. Total estimated savings4.

Answered: Image /qna-images/answer/c7d5f489-dd0b-4e2d-a5dd-9491718b0ea9.jpg

Destin Company produces water control valves, made of brass, that it sells primarily to builders for use in commercial real estate construction. These valves must meet rigid specifications (i.e., the quality tolerance is small). Valves that, upon inspection, get rejected are returned to the Casting Department; that is, they are returned to stage 1 of the four-stage manufacturing process. Rejected items are melted and then recast. As such, no new materials in Casting are required to rework these items. However, new materials must be added in the Finishing Department for all reworked valves. As the cost accountant for the company, you have prepared the following cost data regarding the production of a typical valve: Cost Direct materials Direct labor Variable manufacturing overhead Allocated fixed overhead ITTII Casting $ 250 135 150 95 Finishing $ 15 145 175 105 Inspection 20 20 65 Packing $ 10 20 20 35 Total $ 275 320 365 300 $ 630 $ 440 $ 105 $ 85 $ 1, 260 The company, spurred by intense price pressures from foreign manufacturers, recently initiated a number of quality programs. As a result, the rejection rate for valves has decreased from 5.1% to 3.9% of annual output (equal in total to 20,000 units). The reduction in reject rates has enabled the company to reduce its inventory holdings from $450,000 to $275,000. Destin estimates that the annual financing cost associated with inventory holdings is 11%. Required: 1. What are the estimated manufacturing cost savings per year associated with the reduction in rework costs? 2. What are the annual financing cost savings associated with the reduction in inventory holdings? 3. Provide a dollar estimate of the total annual cost savings associated with the recently enacted quality improvements.

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter1: Introduction To Cost Management

Section: Chapter Questions

Problem 2E: Hepworth Communications produces cell phones. One of the four major electronic components is...