choice o/LLA Consumer, Inc. produces and distributes a variety of consumer produets. For simplicity, the story is eondensed to highlight two produets, eonsumer staples (with quantity ql) and fashion goods (with quantity <12). The produetion process is simple.

Prefabrieated items and paekaging materials are purehased from suppliers, the items are then assembled, paekaged, and shipped. Assembly and paekaging have limited eapaeities. Relevant teehnology and eost estimates are provided below.

sales revenue 95ql + 180<12;

direet material costs in assembly 12ql + 18<12;

direet material costs in paekaging 2ql + 9q2;

direet labor costs in assembly 14ql + 28<12;

direet labor costs in paekaging lOql + 10<12; and distribution eost 2ql + 3q2'

The standard wage rate is 14 per hour in assembly and 10 per hour in paekaging.

The eapaeity constraints are expressed in terms of direet labor hours, with 600,000 available in assembly and 480,000 available in paekaging.

Three overhead eategories are reeognized: assembly (OV J, paekaging (OV p)

and general (OV G)' The third eategory, general, indudes cost items that eannot be identified with individual produets or departments. A firm-wide overhead eharging rate of 27 per hour of direet labor is used.

a J The tentative produetion plan ealls for emphasis on fashion goods (q2), as this produet is estimated to be far more profitable than the eonsumer staple produet.

Verify this daim, using the noted overhead eharging rate. Also, using this eharging rate, estimate the firm's income using this produetion plan.

b J The middle level managers find the tentative plan in [a J flawed, and confide in Ralph. They daim the firm has for too long been influeneed by outdated aeeounting measures and scoff at the profitability measures used in part [a J. Further diseussion reveals they harbor the following overhead estimates:

OV A = 2,000,000 + 200% of assembly direet labor cost;

OV p = 1,000,000 + 125% of paekaging direet material cost; and OV G = 5,000,000 + 3.5(total direet labor hours).

Using these LLAs, determine the firm's best output schedule. What income ean the firm expeet if this plan is used? How mueh additional income does the improved plan contribute?

eJ At this point the overhead LLAs are ealled into question. The data listed below

(000 omitted) are eolleeted from 15 recent periods. OV A' OV p and OV G are the respeetive overhead amounts. DLH denotes to tal direet labor hours, DL$A denotes direet lahor dollars in assembly, and DM$p denotes direet material dollars in paekaging. Are the middle managers' conjeetures consistent with the data?

dj How mueh would you pay to distinguish between the managers' eonjeetures and the statistieal estimates you derived in [e) above?

el Those who advocated the originaI plan are now somewhat contrite. They acknowledge the use of a full cost charging rate in estimating the product costs but are not convineed the use of separate overhead pools is worth the extra effort.
Statistically estimate the single overhead pool LLA, and use this estimate to locate an optimal production plan. Carefully explain your findings.
t OVA OVp OVG DLH DL$A DM$p 1 19,603 3,235 6,189 1,085 8,652 1,991 2 20,118 3,961 5,524 1,229 9,884 2,327 3 22,832 4,003 4,452 1,331 10,668 2,489 4 23,104 4,093 6,452 1,315 10,542 2,461 5 23,064 4,286 3,906 1,316 10,640 2,540 6 23,418 3,896 4,139 1,334 10,696 2,498 7 21,821 3,932 4,818 1,228 10,038 2,464 8 24,016 4,015 4,715 1,384 11,186 2,668 9 20,525 3,782 5,565 1,201 9,506 2,143 10 22,021 3,863 6,325 1,284 10,304 2,412 11 21,460 4,187 2,979 1,234 9,912 2,326 12 20,562 3,813 5,668 1,169 9,282 2,111 13 20,484 3,976 6,509 1,225 9,716 2,203 14 22,511 4,216 5,074 1,310 10,570 2,510 15 18,180 2,665 4,601 989 7,798 1,739.

AppendixLO1