Fundamental Accounting Principles
Fundamental Accounting Principles
24th Edition
ISBN: 9781259916960
Author: Wild, John J., Shaw, Ken W.
Publisher: Mcgraw-hill Education,
Question
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Chapter C, Problem 2E

Requiremnet-1a:

To determine

To Compute:

The overhead cost per unit for each product line using the activity based costing.

Requiremnet-1a:

Expert Solution
Check Mark

Answer to Problem 2E

Solution:

The overhead cost per unit for the Model 145 is $515.59 and Model 212 is $265.12.

Explanation of Solution

    ActivityA. Overhead CostsB. Expected ActivityC. Activity Rate (A/B)Model 145Model 212
    D1. Activity driver incurredE1. Overhead assigned=C*D1D2. Activity driver incurredE2. Overhead assigned=C*D2
    Components($)($)($)($)
    Changeover 500,000800Number of batches625.00per batch400250,000400250,000
    Machining279,0006,000Machine hours46.50per machine hours1,80083,7004,200195,300
    Setups225,000120Setups1,875.00per setup60112,50060112,500
    Finishing
    Welding180,3003,000Welding hours60.10per welding hour80048,0802,200132,220
    Inspecting210,000700Number of inspections300.00per inspection400120,00030090,000
    Rework75,000300Rework orders250.00per rework order16040,00014035,000
    Support
    Purchasing135,000450Purchase orders300.00per purchase order30090,00015045,000
    Providing Space32,0005,000Number of units produced6.40per unit1,5009,6003,50022,400
    Providing Utilities65,0005,000Number of units produced13.00per unit1,50019,5003,50045,500
    Total overhead cost773,380927,920
    Total units produced1,5003,500
    Overhead cost per unit515.59265.12

The formula for calculating overhead cost per unit using activity based costing is:

  Overhead cost per unit=Total Overhead Cost/Number of units produced

Thus using the above formula, the overhead cost per unit for both the models are calculated as below:

Model 145:

Total overhead cost [As calculated in the table] is: $773,380

Number of units produced: $1,500

Overhead cost per unit for Model 145: $773,380/1,500=$515.59

Model 212:

Total overhead cost [As calculated in the table] is: $927,920

Number of units produced: $3,500

Overhead cost per unit for Model 212: $927,920/3,500=$265.12

Conclusion

Hence the overhead cost per unit for the Model 145 is $515.59 and Model 212 is $265.12.

Requirement-2:

To determine

The total cost per unit for each product line if the direct labour and direct materials costs per unit are $250 for Model 145 and $180 for Model 212.

Requirement-2:

Expert Solution
Check Mark

Answer to Problem 2E

Solution:Model 145: $250+$515.59=$765.59

Model 212: $180+$265.12=$445.12

Explanation of Solution

The formula for computing total cost per unit is:

  Direct Material+Direct Labor+Overhead

Hence using the above formula the total cost per unit for each model is computed as below:

Model 145:

Given,

Direct Material and labour costs per unit: $250

Overhead Cost for Model 145 (As calculated in Requirement-1): $515.59

Total costs per unit for Model 145: $250+$515.59=$765.59

Model 212:

Given,

Direct Material and labour costs per unit: $180

Overhead rate for Model 212 (As calculated in Requirement-1): $265.12

Total costs per unit for Model 212: $180+$265.12=$445.12

Conclusion

Hence the total cost per unit for Model 145 is $765.59 and Model 212 is $445.12.

Requirement-3a:

To determine

The profit or loss per unit for each model when the market price is $800 for Model 145 and $470 for Model 212

Requirement-3a:

Expert Solution
Check Mark

Answer to Problem 2E

Solution:

Model 145:

Profit/Loss per unit: $800-$765.59

Profit= $34.41

Model 212:

Profit/Loss per unit: $470-$445.12

Profit=$24.88

Explanation of Solution

The formula for determining profit or loss per unit is:

  Profit or Loss per unit=Market price per unitCost per unit

Hence the profit or loss for each model is determined using the formula as below:

Model 145:

Market Price per unit: $800

Costs per unit: $765.59

Profit/Loss per unit: $800-$765.59

Profit=$34.41

Model 212:

Market Price per unit: $470

Costs per unit: $445.12

Profit/Loss per unit: $470-$445.12

Profit: $24.88

Conclusion

Hence the Model 145 contributes to the profit of $34.41 and Model 212 has the profit of $24.88.

Requirement-3b:

To determine

To discuss:

The results of profit for both the models when the market price is $800 for Model 145 and $470 for the Model 212

Requirement-3b:

Expert Solution
Check Mark

Answer to Problem 2E

Solution:

The profit contributed by Model 145 of $34.41 is greater than the profit of $24.88 contributed by Model 212 which means that Model 145 ensures the competitive success of the business compared to the Model 212. Therefore either the market price of the Model 212 should be increased or the total costs per unit of the model should be reduced if the Model 212 expects to earn a higher profit.

Explanation of Solution

Both Model 145 and Model 212 of air conditioners contribute to the profit of the Real Cool Company. However the Model 145 contributes to the higher profit of $34.41 when compared to Model 212 that contributes only to $24.88.

The production profit significantly matters to the company to continue the proposal in the long run. Hence in the given scenario, manufacturer should chose the manufacturing model that contributes to the higher profit of the company.

Conclusion

Hence the Model 145 of Real Cool manufacturers contribute to the higher profit making the production more profitable compared to the profit generated by the Model 212. Thus the Model 145 ensures for the competitive success of the business and its survival in the long run in the given scenario.

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