Question

Excellent Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2018, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages.
For 2018 Excellent Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:
Cost pool Manufacturing overhead costs Activity level
Design changes $ 120,000 300 design changes
Setups 640,000 5,000 setups
Inspections 80,000 8,000 inspections
Total manufacturing overhead costs $840,000
During 2018, two customers, Money Managers and Hospital Systems, are expected to use the following printing services:
Activity Money Managers Hospital Systems
Pages 60,000 76,000
Design changes 10 0
Setups 20 10
Inspections 30 38
When costs are assigned using the single cost driver, number of pages printed, then:__________.
A. Money Managers will likely seek to do business with competitors
B. Money Managers is grossly under billed for the job, while other jobs will be unfairly over billed
C. Excellent Printers will want to retain this highly profitable customer
D. Money Managers is unfairly over billed for its use of printing resources

Answer 1

Answer:

B. Money Managers is grossly under billed for the job, while other jobs will be unfairly over billed

Explanation:

The single overhead rate would be $ 0.07 per page

Overhead Rate = $ 840,000/ 12 million pages = 0.07 per page.

The other rates  are

design changes  rate = $ 120,000/300= $ 400 per design

Inspections rate = $ 80,000/8000= $ 10 per inspection

Setups  rate = $ 640,000/5000= $ 128 per setup  

Money managers will be under billed for the job as the overhead rates for other costs are higher than the single overhead rate which is $ 0.07 per page.

And if other overhead rates are used other jobs will be over billed.

Using a single overhead rate for 60,000 pages for Money Managers would mean 60,000 * $ 0.07 = $ 4200

Where as if the same job is billed using other overhead rates it would cost

Money Managers   $ 6860 = $ 4000 + $ 2560 + $ 300

Design = $400 * 10 = $ 4000

Setups = $ 128 * 20 = $ 2560

Inspections $ 10 * 30 = $ 300

So it is under billed and other jobs over billed.