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Weston Corporation manufactures a product that is available in both a deluxe and a regular model. The company has made the regular model for years; the deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined. Sales of the deluxe model have been increasing rapidly.
Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year,

Management estimated that $3,080,000 in overhead costs would be incurred and the company would produce and sell 10,000 units of the deluxe model and 50,000 units of the regular model. The deluxe model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Materials and
Labor costs per unit are given below:

Deluxe Regular
Direct materials cost per unit $50.00 $30.00
Direct labor cost per unit $30.00 $15.00

Required

a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of each model. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. . It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed below:

Activity Cost Pool and Activity Measure Estimated
Overhead cost Activity
Deluxe Regular Total
Purchase orders (number of orders) $ 60,000 500 1,000 1,500
Rework requests (number of requests) 280,000 800 2,000 2,800

Product testing (number of tests) 240,000 7,000 3,000 10,000
Machine-related (machine-hours) 2,500,000 4,500 8,000 12,500
$3,080,000

Required:

b. Compute the activity rate (i.e., predetermined overhead rate) for each of the activity cost pools.

c. Assume that actual activity is as expected for the year. Using activity-based costing, do the following: I. Determine the total amount of overhead that would be applied to each model for the year.
II. Compute the unit product cost for one unit of each model.

d. Can you identify a possible explanation for the company’s declining profits? If so, what is it?


2. Great Company manufactures 60, 000 units of part XL-40 each year for use on its production line. The following are the costs of making part XL-40:
Total Costs Cost per
60, 000 units unit

Direct material Br. 480, 000 Br.8
Direct labor 360, 000 6
Variable factory overhead (FOH) 180, 000 3
Fixed FOH 360, 000 6
Total manufacturing costs Br. 1, 380, 000 Br.23

Another manufacturer has offered to sell the same part to Great for Br.21 each. The fixed overhe ad consists of depreciation, property taxes, insurance, and supervisory salaries. The entire fixed overhead would continue if the Great Company bought the component except that the cost of Br. 120, 000 pertaining to some supervisory and custodial personnel could be avoided.

Instructions:

a) Should the parts be made or bought? Assume that the capacity now used to make parts internally will become idle if the pats are purchased?
b) Assume that the capacity now used to make parts will be either (i) be rented to nearby

manufacturer for Br. 60, 000 for the year or (ii) be used to make another product that will yield a profit contribution of Br. 250,000 per year. Should the company purchase them from the outside supplier?

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