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% Workminus Minus Process inventory $250,000 $180,000 Inventory carrying costs are estimated to be 10% per year. As a result of the layout reorganization, incremental manufacturing costs are projected to:

$40,000 increase

Explanation:

Note: The data in the question are merged together and they are first sorted before answering the question as follows:

                                                 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%

Now, the explanation to the answer is as follows:

Direct materials before = $1,200,000 * 23% = $276,000  

Direct labor before = $1,200,000 * 9% = $108,000

Manufacturing support costs before = $1,200,000 * 18% = $216,000

Total cost before the change = $600,000

Direct materials after = $1,600,000 * 20% = $320,000  

Direct labor before = $1,600,000 * 7% = $112,000

Manufacturing support costs before = $1,600,000 * 13% = $208,000

Total cost after the change = $640,000

Incremental manufacturing costs = Total cost after the change - Total cost before the change = $640,000 - $600,000 = $40,000 increase

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