Report objective: Analyze the case of Camberland metal industries, and identify the following 5 particular issues.
1.What is the approximate cost of producing the curled metal pads?
Usually costs take two forms, fixed and variable. Of the two forms, fixed costs do not vary with production or sales revenue. In this case, the fixed component of the estimate of pad costs (exhibit 6) is unreasonable because of the assumption by which the fixed charge must equal to 360% of direct labor to cover the overhead of its large engineering staff. Besides, to the new product, little engineering had been done and excess capacity had been used for manufacturing. By activity based costing system, there is no reason to charge 360% of labor as fixed costs.
The fixed rate per unit may vary with the production volume. If assuming a 5 years linear depreciation period for the additional equipment, the additional fixed cost incurred is: 75000/(5* 12* 250) = $5 per pad.
It is less than the difference of labor costs between the two options at any size. So, CMI would be better to add new equipment for the new product. Given the other fixed costs by the ratio (0.45 on average) of fixed to variable in CMI's previous income statements, we can estimate the approximate cost for the popular size of 11 1/2 as follows:
(Material 15.64 + labor 11.64)*(1+0.45) + 5.00 = $ 44.6 per pad
2.Based on the Colerick and Fazio studies, what is the estimated saving per metal pad?
Cumberland Metal Industries:
Value Creation Analysis
Colerick TestFazio Test
Cost per set $50$40
Number of sets required 201501
Pile Driving Costs
Average cost per hour86868686
Estimated time costs
Total feet driven15000150001200012000