1. Wow! is that Red-92 model ever a loser! It's time to cutback it's production shift our resources toward new Terry-95 model, Garry Taylor, executive vice-president of Taylor Products Inc. "Just look at the this income statement I've received from accounting. Terry-95 is generating over eight times as much as profit as Red-92 one-sixth of unit sales. I'm convinced that our future depend on the Terry-95. The year-end statement Thomas was referring is shown below. Total Model Red-92 Terry-95 Sales $ 11,125,000 $ 9,000,000 $ 2,125,000 Cost of Goods sold $ 6,900,000 $ 5,490,000 $ 1,410,000 Gross Margin $ 4,225,000 $ 3,510,000 $ 715,000 Less: Selling and Administrative Expense $ 3,675,000 3,450,000 $ 225,000 Operating Income $ 550,000 $ 60,000 $ 490,000 No. of units produced $ 30,000 $ 5,000 "The numbers sure look that way", replied Judy Walker, the company's sales manager. "But why isn't competition more excited about T-95? I know we've been producing the model only for three years, but I am surprised that more of our competitors haven't recognized what a cash cow it is." "I think it's our new automated plant", replied Taylor. "Now it takes only two direct labour-hours to produce a unit of the Red-92 and three direct labour-hours to produce a unit of the Terry-95. That's considerably less than it used to take us. "I agree that automation is wonderful", replied Walker. "I suppose that's how we're able to hold down the price of T-95. Turner Company in England tried to bring out a Terry-95 but discovered they couldn't touch our price. But Turner is killing us on the Red-92 by undercutting our price with some of our best customers. I suppose they will pick all of our Red-92 business if we move out of that market. But who cares? We don't have to advertise T-95; it just seems to sell itself." "My only concern about automation is how our manufacturing OH rate has shot up", replied Taylor. "But I think we've got a problem in production. Our total manufacturing OH cost is $2,700,000. That comes out to be a hefty amount per direct labour-hour, but Diana down in accounting has been using direct labour-hour as the base for computing overhead rates for years doesn't want to change. I don't suppose it matters as long as costs get assigned to the products". "I've never understood that debit and credit stuff, replied Walker. "But I think we've got a problem in production. I had lunch with Jenny, our plant manager, yesterday and she complained about how complex T-95 to produce". Apparently, they have more work to with more machine setups, special soldering and also have to inspect each unit." "It will have to wait", said Taylor. "I am writing a proposal to Board of Directors to phase out R-92. We've got to increase our bottom line or we'll all be looking for jobs". Required: 1. Compute the predetermined overhead rate based on direct labour-hours that company used during the year. 2. Direct materials and labour costs per unit for the two products are below: Red-92 Terry-95 Direct Material $ 75 $ 120 Direct labour $ 36 $ 54 Using the data and rate computed in (1) above, determine the unit product cost of each product under the company's traditional costing system. 3. Assume company's $2,700,000 in manufacturing OH cost can be assigned to six activity cost pools as below: Expected Activity Activity Cost Pool Estimated OH Cost Total Red-92 Terry-95 Machine Setups (No.of setups) $ 312,000 1,600 1,000 600 Quality Control (No. of inspections) $ 540,000 9,000 4,000 5,000 Purchase Orders (No.of order) $ 135,000 1,200 840 360 Soldering (No. of solder joints) $ 675,000 200,000 60,000 140,000 Shipments (No. of Shipments) $ 198,000 600 400 200 Machine Related (Machine -Hours) $ 840,000 70,000 30,000 40,000 $ 2,700,000 Given these data would you support a recommendation to expand sales of T-95? Explain your position. 4. From the data you prepared in (3) above, why do you suppose the T-95 "just seems to sell itself" 5. If you were the president of Thomas Products Inc. what strategy would you follow from this point forward to improve the company's overall profits?