Question

Way Cool produces two different models of air conditioners. The company produces the mechanical systems in their components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow.

Process Activity Overhead Cost Driver Quantity
Components Changeover $ 470,000 Number of batches 890
Machining 304,000 Machine hours 8,130
Setups 225,000 Number of setups 120
$ 999,000
Finishing Welding $192,000 Welding hours 5,200
Inspecting 235,000 Number of inspections 850
Rework 61,000 Rework orders 220
$ 488,000
Support Purchasing 145,000 Purchase orders 543
Providing space 33,000 Number of units 4,620
Providing utilities 65,000 Number of units 4,620
$ 243,000
Additional production information concerning its two product lines follows.
Model 145 Model 212
Units produced 1,500 3,120
Welding hours 2,000 3,200
Batches 445 445
Number of inspections 480 370
Machine hours 2,850 5,280
Setups 60 60
Rework orders 160 60
Purchase orders 362 181
Required:
1. Determine departmental overhead rates and compute the overhead cost per unit for each product line. Base your overhead assignment for the components department on machine hours. Use welding hours to assign overhead costs to the finishing department. Assign costs to the support department based on number of purchase orders.
2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $250 for Model 145 and $170 for Model 212.
3. If the market price for Model 145 is $1,700 and the market price for Model 212 is $300, determine the profit or loss per unit for each model.

Answer 1

Way Cool

1. Using ABC, the overhead cost per unit for each product line:

Model 145 Model 212

Overhead cost per unit $534.39 $266.12

2. The total cost per unit for each product line, if the direct labor and direct materials costs per unit are $250 for Model 145 and $170 for Model 212:

Model 145 Model 212

Total cost per unit $784.39 $436.12

3. If the market price for Model 145 is $1,700 and the market price for Model 212 is $300, the profit or loss per unit for each model:

Model 145 Model 212

Profit (loss) per unit $915.61 ($136.12)

Step-by-step explanation:

a) Data and Calculations:

Process Activity Overhead Cost Driver Quantity

Components Changeover $ 470,000 Number of batches 890

Machining 304,000 Machine hours 8,130

Setups 225,000 Number of setups 120

Total $ 999,000

Finishing

Welding $ 192,000 Welding hours 5,200

Inspecting 235,000 Number of inspections 850

Rework 61,000 Rework orders 220

Total $ 488,000

Support

Purchasing $ 145,000 Purchase orders 543

Providing space 33,000 Number of units 4,620

Providing utilities 65,000 Number of units 4,620

Total $ 243,000

Additional production information concerning its two product lines follows:

Model 145 Model 212 Total

Units produced 1,500 3,120 4,620

Welding hours 2,000 3,200 5,200

Batches 445 445 890

Number of inspections 480 370 850

Machine hours 1,800 4,200 6,000

Setups 60 60 120

Rework orders 160 60 220

Purchase orders 362 181 543

Overhead Rates per Activity Pool:

Components Changeover $ 470,000/890 = $528

Machining 304,000/ 8,130 = $37.39

Setups 225,000/120 = $1,875

Total $ 999,000

Finishing

Welding $ 192,000/5,200 = $36.92

Inspecting 235,000/850 = $276.47

Rework 61,000/220 = $277.27

Total $ 488,000

Support

Purchasing $ 145,000/543 = $267

Providing space 33,000/4,620 = $7.14

Providing utilities 65,000/4,620 = $14.07

Total $ 243,000

Total overheads = $1,730,000

Model 145 Model 212

Units produced 1,500 3,120

Welding hours $73,840 (2,000*$36.92) $118,144 (3,200*$36.92)

Batches 234,960 (445*$528) 234,960 (445*$528)

Number of inspections 132,706 (480*$276.47) 102,294 (370*$276.47)

Machine hours 106,562 (2,850*$37.39) 197,419 (5,280*$37.39)

Setups 112,500 (60*$1,875) 112,500 (60*$1,875)

Rework orders 44,363 (160*$277.27) 16,636 (60*$277.27)

Purchase orders 96,654 (362*$267) 48,327 (181*$267)

Total overhead costs $801,585 $830,280

Units produced 1,500 3,120

Overhead cost per unit $534.39 $266.12

Total production costs:

Model 145 Model 212

Direct costs per unit $250 $170

Total direct costs $375,000 $530,400

Total overhead costs $801,585 $830,280

Total production costs $1,176,585 $1,360,680

Units produced 1,500 3,120

Total cost per unit $784.39 $436.12

Model 145 Model 212

Market price per unit $1,700.00 $300.00

Total cost per unit 784.39 436.12

Profit (loss) per unit $915.61 ($136.12)