Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 12

The gear cutting department of Universal Transmissions cuts the teeth into gears. These gears are then finished in other departments and assembled into farm and construction equipment transmissions (tractors, combines, bulldozers). The department contains three identical cutting machines that were purchased two years ago. Projected usage of each machine is 2,400 hours a year. The production budget for the year follows.

The operating budget for the gear cutting department for 2010 follows.

Costs in the gear cutting department are assigned to gears based on standard gear cutting machine minutes. At the beginning of the year, the manager sets the cost per minute on the gear cutting machines by dividing budgeted costs in the department (budgeted fixed costs plus budgeted variable costs per machine minute times projected minutes for the year) by projected minutes for the year. The following table summarizes actual operations by gear type.

Required:
a. Identify all the various measures of volume (e.g., actual volume) that can be used in the gear cutting department for 2010. For each volume measure identified, provide the 2010 empirical magnitude.
b. Prior to the beginning of 2010, estimate the cost per minute in the gear cutting department.
c. An outside company offers to provide cutting for gear #A7474 for $63 per gear. This includes pickup and delivery, and the company guarantees the same quality and timeliness as the gear cutting department. Analyze the outside offer and recommend whether or not the offer should be accepted. Be sure to identify any assumptions underlying your recommendation.