Emily Honig, marketing manager for Romer Company, was puzzled by the outcome of two recent bids. The company€™s policy was to bid 150 percent of the full manufacturing cost. One job (labeled Job 97-28) had been turned down by a prospective customer, who had indicated that the proposed price was $3 per unit higher than the winning bid. A second job (Job 97-35) had been accepted by a customer, who was amazed that Romer could offer such favorable terms. This customer revealed that Romer€™s price was $43 per unit lower than the next lowest bid. Emily has been informed that the company was more than competitive in terms of cost control. Accordingly, she began to suspect that the problem was related to cost assignment procedures. Upon investigating, Emily was told that the company uses a plantwide overhead rate based on direct labor hours. The rate is computed at the beginning of the year using budgeted data. Selected budgeted data are as follows:

Emily also discovered that the overhead costs in department B were higher than those in department A because B has more equipment, higher maintenance, higher power consumption, higher depreciation, and higher setup costs. In addition to the general procedures for assigning overhead costs, Emily was supplied with the following specific manufacturing data on Jobs 97-28 and 97-35:

Required:
1. Using a plantwide overhead rate based on direct labor hours, develop the bid prices for Jobs 97-28 and 97-35 (express the bid prices on a per-unit basis).
2. Using departmental overhead rates (use direct labor hours for department A and machine hours for department B), develop per-unit bid prices for Jobs 97-28 and 97-35.
3. Compute the difference in gross profit that would have been earned had the company used departmental rates in its bids instead of the plantwide rate.
4. Explain why the use of departmental rates in this case provides a more accurate productcost.

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Department A Department B Total Overhcad Direct labor hours Machine hours $500,000 200,000 20,000 $2,000,000 2,500,000 250,000 140,000 50,000 120,000 Job 97-28 A Department B Department Total Direct labor hours Machine hours Prime costs Units produced 5,000 200 $100,000 14,400 1,000 500 $20,000 14,400 6,000 700 $120,000 14,400 Job 97-35 Department A Department B Total Direct labor hours Machine hours Prime coStS Units produced 400 200 $10,000 1,500 600 3,000 $40,000 1,500 1,000 3,200 $50,000 1,500