Ashlyn Company manufactures three products. Gross margin computations for these three products for 2012 are as follows:

Ashlyn has reexamined the factors that cause its manufacturing overhead costs and has discovered that $225,000 of the annual amount of manufacturing overhead is directly related to the number of product batches produced during the year. The number of batches of the three products for 2012 was as follows: Widgets, 225 batches; Gidgets, 150 batches; Zidgets, 75 batches. The remaining $375,000 in manufacturing overhead is for facility support (property taxes, security costs, general administration, etc.) and does not vary at all with levels of manufacturing activity in the company.
Required:
1. Assume that the Zidget product was eliminated at the start of the year. Estimate what the gross margin for the remaining two products would have been. Use the direct labor cost method of overhead allocation.
2. Now, assume that both the Gidget and Zidget products were eliminated at the start of the year. Estimate what the gross margin for the remaining product, Widgets, would have been. (Note that no manufacturing overhead allocation computation is needed because there is only one product.)
3. In light of your answers in parts (1) and (2), what problems can arise when facility support manufacturing overhead costs are allocated?
4. Prepare gross margin calculations for Ashlyn's three products assuming that manufacturing overhead is allocated based on the number of batches. Also, show a "total" column. Facility support costs are not to be allocated to any of the products, but are to be subtracted in the "total" column in the computation of total company operatingprofit.

Transcribed Image Text:

Zidgets Widgets Gidgets Sales Direct materials. Direct labor.. Manufacturing overhead" Gross margin S 600,000 S 525,000 S 450,000 (37,500) (112,500) (37,500) (150,000) (187,500) (300,000) S 390,000 S 97,500 S(187,500) "Manufacturing overhead is allocated to production based on the amount of direct labor cost.