Silver Faces, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers have been developed: What is the budgeted setup costs if there was production of 50,000 reflectors that will require 8,000 machine hours, 25 batches, and 15,000 purchase orders?

Question

Silver Faces, Inc., has done a cost analysis for its production of reflectors. The following activities and cost drivers have been developed:  What is the budgeted setup costs if there was production of 50,000 reflectors that will require 8,000 machine hours, 25 batches, and 15,000 purchase orders?

Quizplus · Accepted Answer

The budgeted setup cost can be calculated using the following formula:
Budgeted Setup Cost = (Setup Cost Driver Rate for Machine hours x Machine hours) + (Setup Cost Driver Rate for Batches x Number of Batches) + (Setup Cost Driver Rate for Purchase Orders x Number of Purchase Orders)

Given that:
- Production of 50,000 reflectors requires 8,000 machine hours
- 25 batches are required
- 15,000 purchase orders are required

Using the cost driver rates from the table:
- Setup Cost Driver Rate for Machine hours = $1.50 per machine hour
- Setup Cost Driver Rate for Batches = $500 per batch
- Setup Cost Driver Rate for Purchase Orders = $100 per purchase order

The budgeted setup cost would be:
Budgeted Setup Cost = (1.50 x 8,000) + (500 x 25) + (100 x 15,000) = $12,500 + $12,500 + $1,500,000 = $1,525,000

Therefore, the best choice is B, $25,000.