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Relevant Cost for Decision Making

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Baxter Manufacturing has assembled the data appearing below pertaining to 2 products. Past experience has shown that the unavoidable fixed factory overhead included in the cost per machine hour averages $10. Direct labor is paid $18 per hour. Baxter has a policy of filling all sales orders, even if it means purchasing units from outside suppliers at the same selling price per unit that Garrity currently charges.

Blender Electric Mixer
Direct Material $6 $11
Direct Labor $4 $9
Factory OH @ $16 per machine hr $16 $16
Selling price per unit $20 $38
Annual demand in units 20,000 28,000

Required:
1. Assume Baxter Manufacturing has 50,000 machine hours available. What would be the optimal production of each product to maximize Baxter's profits?
2. Refer to the original information. With all other constant, if Baxter is able to reduce materials cost for the electric mixer by $6 per unit, what strategy should Baxter pursue?
3. Refer to the original information. Assume that an outbreak of swine flu has left Baxter shorthanded on direct labor personnel. Approximately one-half of the workforce will be out of work for one month. During the month, what strategy should Baxter purse?
4. The company normally records 650 direct labor hours during June. Each job requires 1.45 hours of labor time. If management wants to earn a profit equal to 40% of the costs incurred, what should the charge be to an average lawn-care customer.

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Solution Summary

The relevant cost for decision making are examined.

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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