Mail0073 - Engineering Economy Costing and...

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Unformatted text preview: Engineering Economy, Costing and Accounting (IM21001) Mid—Term Examination 2006-2007 Full Marks: 30 Time: 2 Hours Answer all Questions. Question 1: Reliable Machining Products (RMP) is an automotive component supplier. RMP has been approached by General Motors to consider expanding its production of part H707 to a total annual quantity of 2,000 units. The proposed (quoted) unit sales price of the part'is 8.5.7.50. RMP uses a traditional costing system that allocates indirect manufacturing costs bascd on direct- iabour costs. The rate currently used to allocate indirect manufacturing costs is 400% of direct- labour costs. This rate is based on the Rs.3,300,000 annual factory overhead divided by" Rs.825,000 annual direct-labour cost. To produce 2,000 units of H707 required Rs._5,000 of direct materials and Rs.1,000 of direct labour. \, The management of RMP decided to examine the effectiveness of their traditional costing system versus an activity-based costingsystem. The following data have been collected by a team consisting of accounting and engineering analysts: Activity Center Cost Drivei-s Traceable Factory Overhead Costs No. of setups . 50,000 schedulin_ ‘ . N0. of setups_‘__fi______‘ lggpwfi 600,000 Shipping No. of containers '- Shi ped ~ No. of shipments . administration in, No. of machine-hours- Total indirect manufacturing cost The accounting and engineering team has performed activity analysis and provides the following estimates for the total quantity of cost drivers to be used to produce 2,000 ,units of part H707: Pieces scrapped Setups Containers shipped Shipments Machine Hours -—H~«—--" I Based on the traditional cost system, find the per-unit costs, the gross margin, and the gross margin percentage. ' Based on the ABC results, which course of action would you recommend regarding the proposal by General Motors? (7) ...
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