Chapter 17: Q17E (page 792)

Consider the following data for two products of Gitano Manufacturing.
Overhead Cost Product A Product B
Number of units produced 10,000 units 2,000 units
Direct labor cost 0.20 DLH per unit 0.25 DLH per unit
(@ $24 per DLH)
Direct materials cost $2 per unit $3 per unit
Activity
Machine setup $121,000
Materials handling 48,000
Quality control inspections 80,000
$249,000
Required
1. Using direct labor hours as the basis for assigning overhead costs, determine the total production cost per unit for each product line.
2. If the market price for Product A is $20 and the market price for Product B is $60, determine the profit or loss per unit for each product. Comment on the results.
3. Consider the following additional information about these two product lines. If ABC is used for assigning overhead costs to products, what is the cost per unit for Product A and for Product B?
Product A Product B
Number of setups required for production 10 setups 12 setups
Number of parts required 1 part/unit 3 parts/unit
Inspection hours required 40 hours 210 hours
4. Determine the profit or loss per unit for each product. Should this information influence company strategy? Explain.

Short Answer

Expert verified

Answer

Cost per unit under the Plant-wide rate method

For Product Line A: $26.72

For Product Line B: $33.9

Cost per unit under the ABC method

For Product Line A: $16.58

For Product Line B:$84.6

Step by step solution

Calculation of total production cost per unit

$D i r e c t L a b o r h o u r f o r p r o d u c t A = N o . o f u n i t s \times D L h o u r p e r u n i t = 10, 000 \times 0.2 = 2, 000 H o u r$

$D i r e c t L a b o r h o u r f o r p r o d u c t B = N o . o f u n i t s \times D L h o u r p e r u n i t = 2, 000 \times = 500 H o u r$

For Product Line A

$T o t a l O v e r h e a d C o s t f o r P r o d u c t A = T o t a l O v e r h e a d C o s t \times \frac{T o t a l D L h o u r f o r p r o d u c t A}{T o t a l D L h o u r f o r b o t h p r o d u c t l i n e} = $ 249, 000 \times \frac{2, 000}{2, 000 + 500} = $ 249, 000 \times 0.8 = $ 199, 200$

$T o t a l P r o d u c t i o n C o s t p e r u n i t = D i r e c t M a t e r i a l C o s t p e r u n i t + D i r e c t L a b o r c o s t p e r u n i t + O v e r h e a d c o s t p e r u n i t = $ 2 + ($ 24 \times 0.2) + \frac{$ 199, 200}{10, 000} = $ 2 + $ 4.8 + $ 19.92 = $ 26.72$

For Product Line B

$T o t a l O v e r h e a d C o s t f o r P r o d u c t B = T o t a l O v e r h e a d C o s t \times \frac{T o t a l D L h o u r f o r p r o d u c t B}{T o t a l D L h o u r f o r b o t h p r o d u c t l i n e} = $ 249, 000 \times \frac{500}{2, 000 + 500} = $ 249, 000 \times 0.2 = $ 49, 800$

$T o t a l P r o d u c t i o n C o s t p e r u n i t = D i r e c t M a t e r i a l C o s t p e r u n i t + D i r e c t L a b o r c o s t p e r u n i t + O v e r h e a d c o s t p e r u n i t = $ 3 + (24 \times 0.25) + \frac{$ 49, 800}{2, 000} = $ 3 + $ 6 + $ 24.9 = $ 33.9$

Profit or loss per unit

$P r o f i t / L o s s p e r u n i t f o r p r o d u c t A = M a r c k e t P r i c e p e r u n i t - P r o d u c t P e r u n i t = $ 20 - 26.72 = $ 6.72$

$P r o f i t / L o s s p e r u n i t f o r p r o d u c t B = M a r c k e t P r i c e u n i t - P r o d u c t C o s t P e r u n i t = $ 60 - $ 33.9 = $ 26.1$

Cost per unit under ABC

Cost per unit for product A using ABC

$M a c h i n e S e t u p C o s t = T o t a l S e t u p C o s t \times \frac{N u m b e r o f S e t u p b y A}{T o t a l N o . o f S e t u p} = $ 121, 000 \times \frac{10}{10 + 12} = $ 55, 000$

$M a t e r i a l H a n d l i n g C o s t = T o t a l M a t e r i a l H a n d l i n g C o s t \times \frac{N u m b e r o f S e t u p b y A}{T o t a l N o . o f S e t u p} = $ 121, 000 \times \frac{10}{10 + 12} = $ 55, 000$

$Q C I n s p e c t i o n C o s t = T o t a l Q C I n s p e c t i o n C o s t \times \frac{N u m b e r o f i n s p e c t i o n h o u r r e q u i r e d b y A}{T o t a l I n s p e c t i o n H o u r} = $ 80, 000 \times \frac{40}{(40 + 210)} = $ 80, 000 \times \frac{40}{250}$

$T o t a l P r o d u c t i o n C o s t p e r u n i t = D i r e c t M a t e r i a l C o s t p e r u n i t + D i r e c t L a b o r C o s t p e r u n i t + O v e r h e a d c o s t p e r u n i t = $ 2 + ($ 24 \times 0.2) + \frac{$ 55, 000 + $ 30, 000 + $ 12, 800}{10, 000} = $ 2 + $ 4.8 + $ 9.78 = $ 16.58$

Cost per unit for product B using ABC

$M a c h i n e S e t u p C o s t = T o t a l S e t u p C o s t \times \frac{N u m b e r o f S e t u p b y B}{T o t a l N o . o f S e t u p} = $ 121, 000 \times \frac{12}{10 + 12} = $ 66, 000$

$M a t e r i a l H a n d l i n g C o s t = T o t a l M a t e r i a l H a n d l i n g C o s t \times \frac{N u m b e r o f p a r t s r e q u i r e d b y A}{T o t a l N o . p a r t s} = $ 48, 000 \times \frac{3 \times 2, 000}{(1 \times 10, 000 + 3 \times 2, 000)} = $ 48, 000 \times \frac{6, 000}{16, 000} = $ 18, 000$

$Q C I n s p e c t i o n C o s t = T o t a l Q C I n s p e c t i o n C o s t \times \frac{N u m b e r o f i n s p e c t i o n h o u r r e q u i r e d b y B}{T o t a l I n s p e c t i o n H o u r} = $ 80, 000 \times \frac{210}{(40 + 210)} = $ 80, 000 \times \frac{210}{250} = $ 67, 200$

$T o t a l P r o d u c t i o n C o s t p e r u n i t = D i r e c t M a t e r i a l C o s t p e r u n i t + O v e r h e a d p e r u n i t = $ 3 + (24 \times 0.25) + \frac{$ 66, 000 + $ 18, 000 + $ 67, 200}{2, 000} = $ 3 + $ 6 + $ 75.6 = $ 84.6$

Profit or loss per unit under ABC

$P r o f i t / L o s s p e r u n i t f o r p r o d u c t A = M a r k e t P r i c e P e r u n i t - P r o d u c t C o s t u n i t = $ 20 - $ 16.58 = $ 3.42$

$P r o f i t / L o s s p e r u n i t f o r p r o d u c t B = M a r k e t P r i c e P e r u n i t - P r o d u c t C o s t u n i t = $ 60 - $ 84.6 = $ 24.6$

Under both the strategy the net loss by both the products amounts to $15,000. So any strategy can be adopted but ABC strategy for allocating overhead would be most suitable as under this strategy the overhead cost has been allocated accurately as per the level of activity by both the product line.

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Short Answer

Step by step solution

Calculation of total production cost per unit

Profit or loss per unit

Cost per unit under ABC

Profit or loss per unit under ABC

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Financial Performance

Managers

Managerial Economics

Influences On Business

Organizational Communication

Change Management

Study anywhere. Anytime. Across all devices.

Company

Product

Help