112 Question 02 (15 Marks) Rehm Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured the regular model for years. The deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company's profits have steadily declined, and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $6,000,000 in manufacturing overhead cost and produce 15,000 units of the deluxe model and 120,000 units of the regular model. The deluxe model requires 1.6 hours of direct labor time per unit, and the regular model requires 0.8 hours. Material and labor costs per unit are as follows: Model Deluxe Regular Direct Materials 154 Direct Labor 16 8 Required: 1. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate. Using this rate and other data from the problem, determine the unit product cost of each model. 2. Management is considering using activity-based costing to apply manufacturing overhead costs to products for external financial reports. The activity-based costing system would have the following four activity cost pools: Estimated Activity Cost Pool Activity Measures Overhead Costs Purchase Orders No Of Purchase orders 252000 Scrap/rework Orders No of scrap/rework orders 648000 Product Testing Number of tests 1350000 Machine Related Machine - Hours 3750000 Total Overhead Cost 6000000 Expected Activity Activity Measures Deluxe Regular Total No Of Purchase orders 800 1200 No of scrap/rework orders 500 400 900 Number of tests 6000 9000 15000 Machine - Hours 20000 30000 50000 Compute the predetermined overhead rates (ie., activity rates) for each of the four activity cost pools 3. Using the predetermined overhead rates computed in part (2) above, do the following: a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit for each model. b. Compute the unit product cost of each model (materials, labor, and manufacturing overhead). 4. From the data you have developed in (1) through (3) above, identify factors that may account for the company's declining profits 400 -Good Luck