Question

Way Cool produces two different models of air conditioners. The company produces the mechanical systems in their components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow.
Process Activity Overhead Cost Driver Quantity
Components Changeover $ 470,000 Number of batches 890
Machining 304,000 Machine hours 8,130
Setups 225,000 Number of setups 120
$ 999,000
Finishing Welding $192,000 Welding hours 5,200
Inspecting 235,000 Number of inspections 850
Rework 61,000 Rework orders 220
$ 488,000
Support Purchasing 145,000 Purchase orders 543
Providing space 33,000 Number of units 4,620
Providing utilities 65,000 Number of units 4,620
$ 243,000
Additional production information concerning its two product lines follows.
Model 145 Model 212
Units produced 1,500 3,120
Welding hours 2,000 3,200
Batches 445 445
Number of inspections 480 370
Machine hours 2,850 5,280
Setups 60 60
Rework orders 160 60
Purchase orders 362 181
Required:
1. Determine departmental overhead rates and compute the overhead cost per unit for each product line. Base your overhead assignment for the components department on machine hours. Use welding hours to assign overhead costs to the finishing department. Assign costs to the support department based on number of purchase orders.
2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $250 for Model 145 and $170 for Model 212.
3. If the market price for Model 145 is $1,700 and the market price for Model 212 is $300, determine the profit or loss per unit for each model.

Answer 1

Answer:

Way Cool

1. Using ABC, the overhead cost per unit for each product line:

                                     Model 145   Model 212

Overhead cost per unit  $534.39      $266.12

2. The total cost per unit for each product line, if the direct labor and direct materials costs per unit are $250 for Model 145 and $170 for Model 212:

                                  Model 145      Model 212

Total cost per unit       $784.39         $436.12

3. If the market price for Model 145 is $1,700 and the market price for Model 212 is $300, the profit or loss per unit for each model:

                            Model 145   Model 212

Profit (loss) per unit  $915.61    ($136.12)

Explanation:

a) Data and Calculations:

Process Activity                  Overhead Cost    Driver                    Quantity

Components Changeover       $ 470,000  Number of batches      890

Machining                                     304,000  Machine hours           8,130

Setups                                          225,000  Number of setups         120

Total                                          $ 999,000

Finishing

Welding                                     $ 192,000  Welding hours            5,200

Inspecting                                    235,000  Number of inspections 850

Rework                                           61,000  Rework orders               220

Total                                         $ 488,000

Support

Purchasing                               $ 145,000  Purchase orders           543

Providing space                            33,000  Number of units        4,620

Providing utilities                          65,000  Number of units        4,620

Total                                        $ 243,000

Additional production information concerning its two product lines follows:

                                  Model 145   Model 212     Total

Units produced                   1,500         3,120      4,620

Welding hours                   2,000        3,200      5,200

Batches                                  445           445        890

Number of inspections         480           370        850

Machine hours                    1,800        4,200    6,000

Setups                                     60              60        120

Rework orders                      160              60       220

Purchase orders                  362             181        543

Overhead Rates per Activity Pool:

Components Changeover       $ 470,000/890 = $528

Machining                                     304,000/ 8,130 = $37.39

Setups                                          225,000/120 = $1,875

Total                                          $ 999,000

Finishing

Welding                                     $ 192,000/5,200 = $36.92

Inspecting                                    235,000/850 = $276.47

Rework                                          61,000/220 = $277.27

Total                                        $ 488,000

Support

Purchasing                               $ 145,000/543 = $267

Providing space                            33,000/4,620 = $7.14

Providing utilities                          65,000/4,620 = $14.07

Total                                        $ 243,000

Total overheads = $1,730,000

                                  Model 145   Model 212

Units produced                   1,500         3,120

Welding hours                 $73,840 (2,000*$36.92) $118,144 (3,200*$36.92)

Batches                           234,960 (445*$528)     234,960 (445*$528)

Number of inspections   132,706 (480*$276.47) 102,294 (370*$276.47)

Machine hours                106,562 (2,850*$37.39) 197,419 (5,280*$37.39)

Setups                              112,500 (60*$1,875)        112,500 (60*$1,875)

Rework orders                  44,363 (160*$277.27)     16,636 (60*$277.27)

Purchase orders               96,654 (362*$267)        48,327 (181*$267)

Total overhead costs    $801,585                       $830,280

Units produced                    1,500                              3,120

Overhead cost per unit  $534.39                         $266.12

Total production costs:

                                        Model 145      Model 212

Direct costs per unit          $250                $170

Total direct costs           $375,000       $530,400

Total overhead costs     $801,585       $830,280

Total production costs $1,176,585    $1,360,680

Units produced                     1,500              3,120

Total cost per unit            $784.39         $436.12

                                 Model 145      Model 212

Market price per unit  $1,700.00       $300.00

Total cost per unit           784.39           436.12

Profit (loss) per unit       $915.61         ($136.12)