P7.33 LO 7.3 7.4 Plantwide versus departmental overhead rates; product pricing: manufacturer Constellation Peripherals Ltd manufactures two different multifunction printers (MFPS) for the business market. Cost estimates for the two models for the current year are as follows: Basic Advanced Direct material $ 800 $1600 Direct labour (20 hours @ $30 per hour) 600 600 Manufacturing overhead* 800 800 Total $2200 $3000 *The predetermined overhead rate is $40 per direct labour hour.

Each model MFP requires 20 hours of direct labour. The basic model requires 5 hours in department A and 15 hours in department B. The advanced model requires 15 hours in department A and 5 hours in department B. The budgeted overhead costs in these two production departments are as follows: Department A Variable cost Fixed cost Department B $32 per direct labour hour $400000 $8 per direct labour hour $400.000 The firm's management expects to operate at a level of 20000 direct labour hours in each production department during the current year. Required 1. Show how the company's predetermined overhead rate was determined. 2. If the firm prices each model MFP at 10 per cent over its cost, what will be the price of each model? 3. Suppose the company were to use predetermined departmental overhead rates. Calculate the rate for each of the two production departments. 4. Calculate the product cost of each model, using the departmental overhead rates calculated in requirement 3. 5. Calculate the price to be charged for each model, assuming the company continues to price each product at 10 per cent above cost. Use the revised product costs calculated in requirement 4. 6. Write a memo to the managing director of Constellation Peripherals making a recommendation as to whether the firm should use a plantwide overhead rate or departmental rates. Consider the potential implications of the overhead rates and the firm's pricing policy. How might these considerations affect the firm's ability to compete in the marketplace?