Corazon Manufacturing Company has a purchasing department staffed by five purchasing agents. Each agent is paid $28,000 per year and is able to process 4,000 purchase orders. Last year, 17,800 purchase orders were processed by the five agents.

Required:

1. Calculate the activity rate per purchase order.

2. Calculate, in terms of purchase orders, the:

a. total activity availability

b. unused capacity

3. Calculate the dollar cost of:

a. total activity availability

b. unused capacity

4. Express total activity availability in terms of activity capacity used and unused capacity.

5. What if one of the purchasing agents agreed to work half time for $14,000? How many purchase orders could be processed by four and a half purchasing agents? What would unused capacity be in purchase orders?

Answer and Explanation:

The computation is shown below:

1 For activity rate per purchased order

= Amount paid by agent : Purchase order

= $28,000 : 4,000

= $7

2

a Total activity availability is

= Purchase order * Number of purchasing agents

= 4,000 * 5

= 20,000

b. Unused capacity is

= Total capacity availability - Last year purchase orders

= 20,000 - 17,800

= 2,200

3

a. Total activity availability ($) is

= Total activity availability * Activity rate per purchasing order

= 20,000 * $7

= $140,000

b. Unused capacity ($) is

= Unused capacity * Activity rate per purchasing order

= 2,200 * $7

= $15,400

4

Total activity availability is

= Activity capacity used + Unused capacity

= 17,800 + 2,200

= 20,000

Dollar cost

Total activity availability is

= Activity capacity used + Unused capacity

= $1,24,600 + $ 15,400

= $140,000

5

a.

Purchase orders to be processed by four and half purchasing agents is

= Purchase order * 4.5

= 4,000X 4.5

= 18,000

b. Now unused capacity is

18000 = 17,800 + unused capacity

So,

unused capacity is

= 18000 - 17800

= 200

We just simply applied the above formulas