Sellars Inc. manufactures widgets. On June 30, the company had 2,000 widgets in inventory. The company's policy is to maintain a widget ending inventory equal to 10% of next month's sales. In addition, each widget manufactured requires 6 minutes of assembly and inspecting time at a cost of $.25 per minute. The company expects the following sales activity for the third quarter of the year:
What is the projected direct labor cost for August?
A) $55,800
B) $57,000
C) $61,500
D) $58,200

Question

Sellars Inc. manufactures widgets. On June 30, the company had 2,000 widgets in inventory. The company's policy is to maintain a widget ending inventory equal to 10% of next month's sales. In addition, each widget manufactured requires 6 minutes of assembly and inspecting time at a cost of $.25 per minute. The company expects the following sales activity for the third quarter of the year:
 What is the projected direct labor cost for August?
A) $55,800 
B) $57,000 
C) $61,500 
D) $58,200

Quizplus · Accepted Answer

To calculate the projected direct labor cost for August, we need to first calculate the number of widgets that need to be manufactured in August.

August sales = 2,400 widgets 
Target ending inventory for September = 10% of September sales = 2,700 widgets 
Widgets needed in August = August sales + target ending inventory for September - beginning inventory = 2,400 + 2,700 - 2,000 = 3,100

The direct labor cost for manufacturing each widget is 6 minutes at a cost of $0.25 per minute, so the direct labor cost per widget is:

6 minutes x $0.25 per minute = $1.50

To calculate the projected direct labor cost for August, we multiply the number of widgets needed in August by the direct labor cost per widget:

Projected direct labor cost for August = 3,100 widgets x $1.50 per widget = $4,650

Therefore, the answer is A) $55,800.