Reference no: EM132770875

The British High Flower Company produces plain napkins and floral napkins. Plain napkins are in much greater demand in the market and the firm sells 120,000 plain napkins a year. The British High Flower Co. sells 6,000 floral napkins per year in small boutiques. Napkins have a short shelf life. They must be distributed, sold, and consumed within two months of manufacture as the customer preference changes constantly.

• Both napkins use the identical production process and production facilities. Direct labor is $0.50 per thing and direct material is $0.50 per thing. Napkins are produced in batches. Plain napkins are produced in batches of 600 units and floral napkins in batches of 30. Each batch of napkins goes through the thingamajig, which is the machine that converts raw inputs into napkins. Each batch requires engineers to reset the machine for the next batch, calibrate settings, and test the first 10 napkins for product quality and conformity to standards. Even if sequential batches of the same napkins are made, setups must be performed for each new batch. All the overhead costs are incurred in setups. Indirect labor, indirect materials, and supplies consumed during setup cost $360,000 per year. The only costs of producing napkins are direct labor, direct materials, and the overhead of setups. The company is currently allocating setup costs to napkins based on direct labor cost.

• The firm has been selling plain napkins for $4 per unit and floral napkins for $6 per unit. But foreign competition for plain napkins is starting to put pressure on the $4 price. Some competitors are selling plain napkins for as low as $3 per unit. Management is considering putting more emphasis on selling floral napkins, whose margins are higher. On the other hand, management worries that the current system for allocating overhead costs is misrepresenting the costs of the two products because direct labor costs are not representative of the time spent by each product on the thingamajig. Management is considering allocating setup costs using machine hours on the thingamajig. A batch of floral napkins requires one hour of machine time and a batch of plain napkins requires 20 hours of machine time.

Problem 1: What is the cost per plain napkins if the basis of allocation is machine hours?