Reference no: EM132514969

Point 1: Stan Holbert, the purchase manager for Champion Industries, recently attended a meeting with a potential supplier, Wallace Materials. At the meeting a Wallace Manager demonstrated a material that was easier to handle and shape than the material currently used by Champion Industries.

Point 2: Current standards call for 10 pounds of material for per unit costing $20 per pound. Direct labor per unit is 2 hours at $ 20 per hour.

Point 3: The new material will cost $ 22 per pound. However, only 9 pounds of material will be needed per unit due to reduced waste. Also direct labor per unit will be reduced to 1.5 hours because the new material is less toxic and easier to handle.

Required:

Question a. Assume the annual production is 100,000 units. Calculate the cost savings associated with using the new material.

Question b. Stan knows that because of an overworked accounting department, standard costs will not be updated in a timely manner. Suppose that the company switches to the new material, what are the expected material and labor variances if standards are not updated?

Question c. Suppose purchase price variances play a prominent role in the evaluation of Stan's job performance. Will he be inclined to suggest use of the new material?