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Power Cycle Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells. The following estimates...

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Accounting

Power Cycle Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells. The following estimates have been prepared to evaluate the benefits from the reorganization:

Before the change

After the change

Total annual sales

$1,200,000

$1,600,000

Costs as percentage of sales:

Direct materials

23%

20%

Direct labor

9%

7%

Manufacturing Support costs

18%

13%

Work-in-process inventory

$250,000

$180,000

Inventory carrying costs are estimated to be 10% per year.

As a result of the layout reorganization, reduced levels of work-in-process inventory are projected to decrease inventory carrying costs annually by: $7,000

As a result of switching to a cellular manufacturing operation, total benefits are projected to increase annually by:

a.

$433,000

b.

$400,000

c.

$367,000

d.

$353,000

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