Cincinnati Flow Technology (CFT) has purchased 10 000 pumps annually from Kobec Inc. Becausethe price keeps increasing and reached $102.00 per unit last year CFT’s management has asked for anestimate of the cost of manufacturing the pump in CFT’s facilities. CFT makes stampings and castingsand has little experience with products requiring assembly.The engineering manufacturing and accounting departments have prepared a report for managementwhich includes the following estimate for an assembly run of 10 000 pumps. Additionalproduction 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 theproduct.Components (outside purchases) ………………………………………………………………………………………………… $ 180 000Assembly labor* ……………………………………………………………………………………………………………………… 450 000Manufacturing overheadAc€ ………………………………………………………………………………………………………….. 675 000General and administrative overheadAc€?! ………………………………………………………………………………………….. 130 500Total costs …………………………………………………………………………………………………………………………. $1 435 500* Assembly labor consists of hourly production workers.Ac€ Manufacturing overhead is applied to products on a direct-labor-dollar basis. Variable-overhead costs vary closely with direct-labor dollars.Fixed overhead …………………………………………………………………………… 50% of direct-labor dollarsVariable overhead ……………………………………………………………………….. 100% of direct-labor dollarsManufacturing-overhead rate ………………………………………………………… 150% of direct-labor dollarsAc€?!General and administrative overhead is applied at 10 percent of the total cost of material (or components) assembly labor and manufacturingRequired: 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.
