Arctic Insulation is a company that uses scrap paper along with fiber to produce insulation material used in home attics. They have two sources of the paper used to produce insulation; bulk paper from scrap dealers, and buying paper from the public at nominal rates. The direct labor cost for processing the bulk paper is much higher at $3.84 per bale compared to $.60 per bale for the purchased bales. The price per pound of scrap paper varies significantly based on market conditions.
The unit cost per bale appears to be falling which would agree with the General Manager’s alternative cost report. It’s hard to accurately compare the costs of producing each bale if total costs aren’t taken into account. Basing the overhead costs on a percentage of direct labor vastly understates overhead for the purchased bales, since a larger percentage of the total cost is the cost to purchase paper. Since the cost of purchasing paper is collected at the divisional level, it isn’t considered in this calculation. Taking a total of the depot and divisional overhead values and dividing them by the total number of bales produced and adding that figure to an actual direct labor cost per bale would produce a more accurate total overhead value. In 1979, the total unit cost per bale was ($10,697,050/1,355,000) $7.89. In 1980, the total unit cost per bale was ($9,636,970/1,650,000) $5.84. Using the General Managers method of distributing overhead, the cost per formed bales in 1979 was $8.56 while the cost per purchased bale was $5.32. In 1980 the cost per formed bale was $7.53 while the cost per purchased bale was $4.29. These calculations agree with the General Managers table and can be found on the attached spreadsheet. This decrease in the production cost per bale was caused by an increase in purchased bales, which have a much lower direct labor cost.
The cost control issue that the President was concerned with involved an increase in salaries of 6% in 1980. It is...
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