Cincinnati Flow Technology (CFT) has purchased 10,000 pumps annually from Kobec, Inc. Because the price keeps increasing and reached $102.00 per unit last year, CFT's management has asked for an estimate of the cost of manufacturing the pump in CF1"s facilities. CFT makes stampings and castings and has little experience with products requiring assembly.
The engineering, manufacturing, and accounting departments have prepared a report for manage¬ment which includes the following estimate for an assembly run of 10,000 pumps. Additional production employees would be hired to manufacture the pumps but no additional equipment, space, or supervision would be needed.
The report states that total costs for 10,000 units are estimated at $1,435,500 or $143.55 per unit. The current purchase price is $102.00 per unit, so the report recommends continued purchase of the product.
Components (outside purchases) $ 180,000
Assembly labor 450,000
Manufacturing overhead+ 875,000
General and administrative overheads 130,500
Total costs $1,435,500
'Assembly labor conies el hourly prediction workers.
1Manufacturin9 overhead is appied to preducts at a cfrect-labor-dollar basis. Vadable.merhead costs vary closely with direct-labor dolbrs.
Eked overhead 50% of direct-later dollars
Variable overhead 100% of direct-labor dollars
Manufacturing-overhead rate 150% of direct-labor dollars
!General and administmtke overhead is applied at 10 percent c4 the total cost el material (or cornponents), assembly !gm and manulacturig overhead
Required: Were the analysis prepared by Cincinnati Flow Technology's engineering, manufacturing, and accounting departments and their recommendation to continue purchasing the pumps correct? Explain your answer and include any supporting calculations you consider necessary.