Required for Part I (Managerial/Cost Accounting):
Your job is to provide management with multiple (three or more) cost calculations that could be used to set product price for the current year (2005) and to explain/justify the amounts you calculate. You are to calculate cost, not to suggest the sells price. To keep matters simple, you may assume that all estimated amounts are accurate (i.e., you do not need to include any extra amount to cover unexpected additional costs).
Off Road, Inc. (ORI) produces and sells a single product, a Dune Buggy. A single
manufacturing plant in Allentown, Pennsylvania, dedicated to manufacturing Dune
Buggies, is expected to run at 75% of capacity* during 2005 and produce 10 Dune Buggies
per day, which equals projected average daily demand. Production of the 3650 Dune
Buggies (10 Dune Buggies per day X 365 days per year) is expected to result in the
following costs for the company for the year ended December 31, 2005:
Corporate Office Costs
Sales and Marketing $650,000 **
General and Administrative 900,000 ***
$1,550,000
Plant Costs
(Allentown, PA)
Plant Administration $500,000
Building Depreciation (straight-line) 2,450,000
Building Utilities 100,000
Equipment Depreciation (units of output) 1,270,000
Product Design Engineering 120,000 **
Process Design Engineering 110,000 **
Quality Control 90,000
Purchasing 250,000
Receiving 40,000
Material Handling 70,000
Raw Materials Used in Production 9,125,000
Direct Labor ($25/hour includes benefits) 9,000,000
23,125,000
Other Costs
Research and Development $500,000 **
Shipping 800,000
Warranty costs 200,000
1,500,000
Total $26,175,000
*In its best years, the plant ran at an average 95% of capacity (practical capacity: the
highest percentage considered attainable), but Dune Buggies are at the mature market stage
with 70-75% expected capacity utilization for the remaining life of the plant.
**Included in the above costs is $700,000 related to development of a new racecar, which,
if successful, will be brought to market in 2006: Sales and Marketing, $110,000; Product
Design Engineering $100,000; Process Design Engineering $90,000; Research and
Development $400,000.
***While some of the corporate General and Administrative Expense involved work on
the feasibility of a new racecar, no records of the corporate-level time or money spent on
the endeavor were maintained.