1. Given some of the problems with Sippican’s cost system, should executives abandon overhead assignment to product entirely and adopt a contribution margin approach? Why or why not? The overhead spending is greater than the direct labour costs or the direct material costs for all three product lines- Valves, Pumps and Flow Controllers (Exhibit 2). Overheads are simply charged at 185% constant for three diverse products. The fact that there is huge variance in the number of units produced per production run- it is 375 for valves and 18 for flow controllers per production run. This shows the reason for high overheads cost too. Hence it calls for checking the cost allocation system of the company.
Since Sippican produces three…show more content… Hence, if we increase the batch size of production then probably we would be able save the cost (as shown below). Assuming every order of flow controllers had 50 units in it. So the no of production runs would be 4000/50=80.
Time and money saved will be in setup labour and setup machine time. Also, it will be saved in the Receiving & Production activity as it depends on the no. of production runs.
The amount of money saved through this will be $83,700. (See the figures below)
b) Set up time directly affect the two costs. One being the usage of setup labour and the other being the machine hours being used. A reduction of setup times for all products will result into saving a lot of labour and machine time.
c) Market share can be increased by offering discounts for large orders.
5. In ‘Sippican B’ estimate the resource demand from Knight’s forecasted sales and production plan in exhibit 1. In order to calculate the resource demand and the cost associated to it we have first listed down all the different processes where the resources are demanded and the amount of those resources is mentioned in the exhibit given in the Sippican – Part B.
We have considered the overhead cost allocation rates to be the same as calculated in question 2.
We can see that the overheads cost has reduced from a total of $629562 to $475135 after the change in the product mix. Majorly the cost incurred
