Question

Henry Manufacturing, which uses direct labor hours to apply overhead to its product line, undertook an extensive renovation and modernization program 2?years ago. Manufacturing processes were reengineered, considerable automated equipment was acquired, and 60% of the company’s nonunion factory workers were terminated. Which of the following statements would apply to the situation at Henry? I. The company’s factory overhead rate has likely increased. II. The use of direct labor hours seems to be appropriate. III. Henry will lack the ability to properly determine labor variances. IV. Henry has likely reduced its ability to quickly cut costs in order to respond to economic downturns.

A. I, II, III, and IV.
B. I and IV only.
C. II and IV only.
D. I and III only.

Answer 1

Henry Manufacturing has likely seen an increase in factory overhead due to modernization and reduced labor flexibility, making B (I and IV only) the correct answer.

Step-by-step explanation:

Given the scenario at Henry Manufacturing, there are several implications:

• Factory overhead rate: With the acquisition of automated equipment and reengineering of processes, the factory's overhead rate has likely increased due to the higher capital costs.
• The use of direct labor hours as a basis for applying overhead may no longer be appropriate because of the reduction in labor and increase in automation.
• Although the company will still have the ability to determine labor variances, they may be less significant post-renovation.
• Labor flexibility: Henry has likely reduced its labor flexibility and thus its ability to quickly cut costs in an economic downturn, given the fixed costs associated with automation.

Therefore, the appropriate answer to the statement question based on the provided situation would be B: I and IV only.