Question

Calculate the total setup costs based on the information provided below - Give rationale for calculations. Blending costs and table is provided.

Setup Costs, S

Blending setup cost was based on the annual salaries of Bob Young and Eliot Wallace (totaling $23,000.00) and the length of time required for these men to withdraw the appropriate spirits from bulk storage and complete rectification for a given item.

Size changeover cost equaled the cost of resetting all machinery for a change in bottle size divided by the average number of different items of a given size processed between size changeovers. The cost of resetting all machines for a change in bottle size was based on the annual salaries of Bob and Eliot and the fact that it took these two men one full day to complete all the machinery adjustments required for a size changeover. In a typical year, Blanchard operated the bottling line for 77 days during the year. The bottling equipment was adjusted approximately 35 times during the year for a change in bottle size; however, an average of 10 different items of a given bottle size were processed between size changeovers, resulting in about 350 separate item-bottling runs during the year.

Label changeover cost was based on the average length of time that the bottling line was shut down to change from one label to another label of a same bottle size. This idle time was assumed to be 30 minutes, consisting of 20 minutes to reset the labeling machine and 10 minutes to restore the labeling machine to continuous error-free operation following the change in labels. Since the part-time bottling laborers remained idle during the label changeover, the cost of this 30 minutes of down-time was based on both the hourly wage rate of these five workers and the annual salaries of Bob and Eliot.

Order-processing cost equaled the yearly cost of two office workers who earned a combined annual salary of $18,000 divided by the total number of separate item-bottling runs per year. These two clerks worked full-time processing the customs duty forms, federal tax forms, state tax forms, and other paperwork required to support the bottling operation.

Annual Demand (R) :

Vodka = 4289

Gin = 2782

Scotch = 538

Whiskey = 3241

Rum = 610

Setup cost, S:

Setup cost per bottle run of an item

S = Blending setup cost + size change cost + label change cost + order processing cost

Blending setup cost = Actual cost of labor for blending during rectification and is different for each item

Size changeover cost = Actual cost of labor to reset all machines for a change in bottle size

Label changeover cost = Average cost of labor to reset labeling machine for a change in labels

Order processing cost = Average cost of administrative labor to process an order for a bottling run

	Blending Setup Costs	Size changeover Cost	Label Changeover Cost	Order Processing Cost	Total Setup Cost (S)
Vodka	$1.15
Gin	$1.08
Scotch	$3.24
Whiskey	$2.62
Rum	$2.33

Answer 1

Blending setup cost = $23000 (annual salaries of Bob Young and Eliot Wallace) +Length of Time required to withdraw appropriate spirit from bulk storage

Size changeover cost =

The cost of resetting all machinery for a change in bottle size / the average number of different items of a given size processed between size changeovers.

The cost of resetting all machines for a change in bottle size = two men (Bob Young and Eliot Wallace) one full day to complete all the machinery adjustments required for a size changeover.

• No. of days (in a year) bottling line operating= 77 days
• No. of times the equipment was adjusted = 35 times
• No. of items processed between each size changeover= 10 nos. ~~ = 35*10=350 items in a year

Label changeover cost = the average length of time that the bottling line was shut down to change from one label to another label of the same bottle size.

Idle Time= 30 minutes (cost is based on the hourly wage rate of 5 workers and annual salary of Bob & Eliot)

Order-processing cost = the yearly cost of two office workers ($18,000)/ the total number of separate item-bottling runs per year.

= 18000/350 =$51.25 per setup

Total setup cost per hour = $80.54