Question

HH Co. uses corrugated cardboard to ship its product to customers. Currently, the company’s returns department incurs annual overhead costs of $72,000 and forecasts 2,000 returns per year. Management believes it has found a better way to package its products. As a result, the company expects to reduce the number of shipments that are returned due to damage by 5%. In addition, the initiative is expected to reduce the department’s annual overhead by $12,000. Compute the returns department’s standard overhead rate per return (a) before the sustainability improvement and (b) after the sustainability improvement.

a) (a) $36 per return; (b) $30 per return
b) (a) $36 per return; (b) $32 per return
c) (a) $40 per return; (b) $34 per return
d) (a) $40 per return; (b) $30 per return

Answer 1

Before the sustainability improvement, HH Co.'s overhead rate per return is $36. After the improvement, with a reduction in returns and overhead costs, the rate is approximately $31.58, which rounds up to $32 per return.

Step-by-step explanation:

To calculate the returns department's standard overhead rate per return before and after the sustainability improvement, we need to divide the overhead costs by the number of returns.

Before the improvement, the overhead is $72,000 and the number of returns is 2,000. Therefore, the overhead rate per return is $36 per return ($72,000 ÷ 2,000 returns).

After the improvement, it is expected to reduce returns by 5%, so the new number of expected returns is 1,900 (2,000 returns - 5% of 2,000). The overhead will also be reduced by $12,000, resulting in new overhead costs of $60,000 ($72,000 - $12,000). The new overhead rate per return is then $31.58 per return, rounded to the nearest cent ($60,000 ÷ 1,900 returns).

The closest choice to the calculated values is (b) (a) $36 per return; (b) $32 per return, when rounding the after-improvement cost to the nearest whole dollar.