Jaybird Inc. produces leather handbags. The sales budget for the next four months is: July 5,000 units, August 7,000, September 7,500, October 8,000. Jaybird Inc.’s ending finished goods inventory policy is 10% of the following month’s sales. Each handbag requires 1.3 hours of unskilled labor (paid $8 per hour) and 2.2 hours of skilled labor (paid $15 per hour). How much is total labor cost during the three months July through September?

$225,680; $305,970; $327,670

Explanation:

Given that,

Sales budget for the next four months:

July = 5,000 units

August = 7,000 units

September = 7,500 units

October = 8,000 units

Wages of unskilled labor = $8 per hour

Wages of skilled labor = $15 per hour

Each handbag requires: 1.3 hours of unskilled labor and 2.2 hours of skilled labor.

Therefore, the beginning inventory is the ending inventory of the previous month.

Firstly, we need to find out the production level for each of the month then we are able to calculate the total labor cost at this production level.

For the month of July:

Production for the month of July:

= Sales + Ending inventory - Beginning inventory

= 5,000 + (10% × 7,000) - (10% × 5,000)

= 5,000 + 700 - 500

= 5,200

Total labor cost:

= Unskilled labor cost + Skilled labor cost

= ($8 per hour × 1.3 hours × 5,200) + ($15 per hour × 2.2 hours × 5,200)

= $54,080 + $171,600

= $225,680

For the month of August:

Production for the month of August:

= Sales + Ending inventory - Beginning inventory

= 7,000 + (10% × 7,500) - (10% × 7,000)

= 7,000 + 750 - 700

= 7,050

Total labor cost:

= Unskilled labor cost + Skilled labor cost

= ($8 per hour × 1.3 hours × 7,050) + ($15 per hour × 2.2 hours × 7,050)

= $73,320 + $232,650

= $305,970

For the month of September:

Production for the month of September:

= Sales + Ending inventory - Beginning inventory

= 7,500 + (10% × 8,000) - (10% × 7,500)

= 7,500 + 800 - 750

= 7,550

Total labor cost:

= Unskilled labor cost + Skilled labor cost

= ($8 per hour × 1.3 hours × 7,550) + ($15 per hour × 2.2 hours × 7,550)

= $78,520 + $249,150

= $327,670

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