"Should Cost" of an Extruded Plastic Part
John Marshall's supplier has quoted $1,100.00 per 1,000 pieces for a plastic molded part. Marshall wants to determine if this price is reasonable. The annual usage is 1,000,000 per year and the supplier is sole source. Marshall decides it will be necessary to develop a "should cost" for the part. Working with his engineering and production departments, they estimate that the direct material cost should be $98.90 and the direct labor cost should be $241.00 for the 1,000 pieces requested in this quote.
From a review of annual report studies Marshall found that similar extrusion companiesof the same size doing similar work have the following average ratios:
The Material Overhead rate =10% of Material Cost
The Indirect Factory Overhead rate =118% of Direct Labor Cost
The Sales, General & Admin. (SG&A) Expense rate =13%
Profit =10%