Final answer:
The student's question addresses calculating the overhead rate based on direct labor costs, decision-making using cost comparisons, and the concept of spreading the overhead. Overhead costs are allocated based on the activity base, and decisions to continue operations are based on whether revenues exceed variable costs.
Step-by-step explanation:
The student's question is concerned with the calculation of fixed costs, direct labor costs, and making decisions based on revenue and variable costs comparisons. If the activity base is direct labor costs, to calculate the overhead rate, divide the total overhead costs by the direct labor costs. In this scenario, that would be $750,000 divided by $1,000,000, resulting in an overhead rate of 0.75, or 75%. This rate would be used for cost allocation purposes in managerial accounting.
Additionally, the question touches on the decision-making process regarding whether a center should continue operating or shut down based on its revenue and variable costs. The center should shut down if it earns revenues of $10,000 and has variable costs of $15,000, because it is operating at a loss where variable costs exceed revenues. Conversely, if the center earns revenues of $20,000 with variable costs of $15,000, it should continue in business, as it is making a profit.
Finally, the concept of 'spreading the overhead' refers to the practice of distributing fixed costs over the quantity of output produced, which decreases the average fixed cost per unit as production volume increases. This principle is illustrated by the descending shape of the average fixed cost curve, which reflects the decreasing cost per unit with increased production levels.