AHM Cases Chapter 18 5&6

Case 18-6
Midwest Office Products

Answer:
Step 1: We need to calculate the per unit cost (per carton) for each line item
Item 1: Personnel Expenses and Warehouse expenses
Particulars
Cost
Personnel Cost
$2,570,000.00
Less: Delivery
$200,000.00
Total Cost
$2,370,000.00
Total Units
80,000.00
Per unit Cost
$29.63
Warehouse Cost
Per Unit Cost
Total Per unit Cost
Item 2: Freight Charges

Particulars
Freight total
Cartons sent
Per Unit Cost
$2,000,000.00
$25.00
$54.63
Cost
$450,000.00
75,000.00
$6.00
Item 3: Delivery Truck Charges

Particulars
Cost
Truck Expenses
$200,000.00
Driver Salary
$250,000.00
Total Cost
$450,000.00
Delivery Hours
6,000.00
Per hour cost
$75.00
Item 4: Order Entry Expenses

Particulars
Cost
Order Entry TC
$840,000.00
Total work hours
24,000.00
Per hour cost
$35.00
For different operations:
Manual Order
$5.25
Line item entry per unit
$2.63
Verification of EDI
$3.50
Item 5: General and selling expenses

General and selling expenses are charged on total cost instead of individual items
Page 1
Case 18-6
Step 2: We now use the above calculation per unit cost for each of the five items
Order
Selling Price
Order Size
Total Merchandise cost
Personnel/warehouse
Coomercial Carrier
Delivery Truck Costs
Order Entry Costs:
Manual Order + Line item
Verification of EDI
Total Overhead Cost
Time to recovery
Finance Cost
Overall Cost
Profit per order
Profit in %
1
$610.00
1
$500.00
$54.63
$6.00
$0.00
2
$634.00
1
$500.00
$54.63
$0.00
$300.00
3
$6,100.00
10
$5,000.00
$546.25
$60.00
$0.00
4
$6,340.00
10
$5,000.00
$546.25
$0.00
$300.00
$0.00
$3.50
$564.13
1
$6.10
$570.23
$39.78
6.52%
$7.88
$0.00
$862.50
4
$25.36
$887.86
-$253.86
-40.04%
$0.00
$3.50
$5,609.75
1
$61.00
$5,670.75
$429.25
7.04%
$31.50
$0.00
$5,877.75
4
$253.60
$6,131.35
$208.65
3.29%
Page 2
Case 18-6
e item
Page 3
Case 18-6
e five items
5
$6,100.00
10
$5,000.00
$546.25
$60.00
$0.00
$31.50
$0.00
$5,637.75
4
$244.00
$5,881.75
$218.25
3.58%
Page 4
Case 18-5
Sippican Corporation (B)
Step 1: We need to re-look at the proposed plan and assess the requirement at each line activity at f
1. Labour Hours:
Total Labor
Original Labor Hours
Current Hours
Reduction needed
Total Labor needed
Unused Time
Per Unit Cost
90
13500
10800
20.00%
72
2700
$26.00
Labor (45*2)
Hours (45*2*7.5*20)
Hours (Given)
In labor Hours
Labor (10800Hrs/(13500/90))
Hours
2. Machine Expenses
Total Machines
Original Machine Hrs.
Current Hours
Reduction needed
Total Machines needed
Unused Time
Per Unit Cost
62
14880
11750
21.03%
49
3130
$22.50
Hours
Hours (62*6*2*20)
Hours (Given)
In Machine Hours
Machines (11750Hrs/(14880/62)
Hours
3. Setup Labor
Total Labor
Current Hours
Reduction needed
Total Setup Labor Needed
Unused Time
Per Unit Cost
30
4500
832
81.51%
6
3668
$26.00
Labor (15*2)
Hours (15*2*7.5*20)
Hours (Given)
In Setup Labor
Labor (832Hrs/(4500/30))
Hours
4. Receiving and Production

Total Labor
Current Hours
Reduction needed
Total Needed for Setup
Unused Time
Per Unit Cost
4
600
195
67.50%
1
405
$26.00
Labor
Hours
Hous (Given)
Receiving and Prodn.
Labor (195Hrs/(600/8))
Hours
5. Engineering
Total Labor
Current Hours
8 Engineers
1200 Hours (8*7.5*20)
700 Given
Page 5
Case 18-5
Reduction needed
Total Engineers Needed
Unused Time
Per Unit Cost
41.67% Engineering
5 Engineers (700Hrs/(1200/8))
500 Hours
$65.00
6. Packaging and Shipping

Total Labor
Current Hours Shipment
Current Hours Packaging
Current Total Hours
Total Labor Needed
Per Unit Cost
28
4200
175
3267
3442
23
$26.00
Labor (14*2)
Hours (14*2*7.5*20)
Hours
Hours
Hours
Labor (3442Hrs/(4200/28))
Step 2: We now use the calculation above to find the Total Cost. Excluding unused time.
Particulars
Units Sold
Sales Revenue
Less: Material Cost
Less Direct Labor (in Proportion)
Contribution Margin
Less: Manufacturing Overheads:
Machine Expenses
Setup Labor
Receiving and Production
Engineering
Packaging and Shipping Hours
Cost of Packaging and Shipping
Gross Margin
Per Division Gross Margin%
Given
Valves
10000
$750,000.00
$160,000.00
$98,800.00
$491,200.00
12000
$960,000.00
$240,000.00
$156,000.00
$564,000.00
Flow Controllers
2500
$275,000.00
$55,000.00
$26,000.00
$194,000.00
$112,500.00
$4,160.00
$1,560.00
$3,900.00
1367
$35,542.00
$333,538.00
44.47%
35.00%
$135,000.00
$4,992.00
$1,560.00
$15,600.00
1633
$42,458.00
$364,390.00
37.96%
5.00%
$16,875.00
$12,480.00
$1,950.00
$6,500.00
367
$9,542.00
$146,653.00
53.33%
38.00%
Page 6
Pumps
Case 18-5
ment at each line activity at first
Page 7
Case 18-5
ing unused time.

Total
24500
$1,985,000.00
$455,000.00
$280,800.00
$1,249,200.00
$264,375.00
$21,632.00
$5,070.00
$26,000.00
$87,542.00
$844,581.00
42.55%
138.00%
Page 8

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How did the company calculate the per unit cost for each item?

How did the company calculate the total overhead cost and profit for each order?

Case 18-6

Midwest Office Products

Item 2: Freight Charges

Item 3: Delivery Truck Charges

Item 4: Order Entry Expenses

Item 5: General and selling expenses

4. Receiving and Production

6. Packaging and Shipping

ment at each line activity at first

ing unused time.

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