(2) KIT Corporation operates in a highly competitive market where jobs are obtained bybids. KIT uses a policy of bidding full cost plus a 25 percent markup. The companyoperates two support departments and two producing departments. Budgeted costs andnormal activity are as follows:Support Departments ProducingDepartments1 2 X ZBudgeted overhead $90,000 $120,000 $300,000 $500,000Maintenance hours (dept. 2) 1,000 - 2,200 1,800Number of employees (dept. 1) - 18 40 60Direct labor hours - - 15,000 3,000Machine hours - - 4,000 20,000The direct costs of Department 1 are allocated on the basis of employees; those ofDepartment 2 are allocated on the basis of maintenance hours. Department X uses directlabor hours to assign overhead costs to products. Department Z uses machine hours.23REQUIRED(a) Allocate the support-department costs to the producing departments using thesequential or step-down method beginning with Support Department 2.(7 marks)(b) Calculate the predetermined overhead rate for each producing departments.(4 marks)(c) The firm is bidding on a job that is estimated to require $100 per unit in directmaterials and $150 per unit in direct labor. Each unit would require eight laborhours in Department X and ten machine hours in Department Z. Determine the bidprice per unit for the job.(9 marks)QUESTION FOUR 25 marksTextbook reference: Chapter 7Norma Richardson, manager of a division specialiazing in concrete pipe and concreteblocks, has just been rebuffed by Eric Hipple, president of the company. Eric had called ameeting of all divisional managers to discuss the downturn in business the company hadbeen experiencing during the past two years. Eric has come down hard on managers,pointing out that their jobs would be on the line if some immediate improvements were notforthcoming.Norma, acting as spokesperson for the divisional managers, has tried to explain to Eric whyrevenues and profits were declining. In the divisional managers view, business wassuffering because residential and commercial construction was down. With the slump in theconstruction business, competition had intensified. Norma indicated that her division haslost several bids to competitors who were bidding below the full cost of the product. Sincecompany policy prohibited divisional managers from accepting any jobs below full cost,these bids were lost. Norma, on behalf of the managers, requested a change in the companypolicy concerning bids. She proposed that he floor bids be changed to variable cost ratherthan full cost. In times of economic distress, bids that cover at least their variable costswould make a positive contribution toward covering fixed costs and would help maintainthe divisions profits.Norma also proposed that divisional income statements be changed to a variable-costingbasis so that a better picture of divisional performance would be available. Additionally,income statements for individual products, organized on a variable-costing basis, wouldprovide better information concerning product performance and would facilitate bidding.24Upon hearing the request, Eric Hipple flatly turned it down. Eric was convinced that allcosts must be covered or the company would go under. Its impossible to sell a product forless than what it costs and stay in business. Those companies that do so will be the first onesto go bankrupt. Also, I want to see the income produced by your divisions when all costs areconsidered not just variable costs. I dont believe in variable costing. If any of you canprove to me that variable costing is a better approach, then I will consider changing.Upon returning home, Norma decided to prepare more formal arguments to convince Eric ofthe value of variable costing. To help in building her case, she had the divisional controllersupply the following information concerning the concrete block line (80 x 80 x 160 blocks):Last quarters production (and sales) 100,000Productivity capacity 140,000Unit manufacturing cost: Direct materials $0.22 Direct labor 0.14 Variable overhead 0.09 Fixed overhead*0.10 Total $0.55*Based on the productive capacity of 140,000 units.Nonmanufacturing costs:Selling costs:Fixed $10,000Variable 5% of salesAdministrative (all fixed) $20,000Total fixed overhead costs were $14,0000 (budgeted and actual). Variable overhead wasincurred as expected. Overhead variances are closed to the Cost of Goods Sold. The averageselling price for the 100,000 units sold was $0.90.REQUIRED1. Prepare absorption-costing and variable-costing income statements for the last quartersresults. Will this information help Norma in building her case?2. Suppose that Norma consults her marketing manager and finds that the division couldhave produced and sold 30,000 more concrete blocks with a unit selling price of $0.54.Compute the gross margin and contribution margin on the sale of these additional30,000 blocks. Discuss why the two figures differ.(4 3. Prepare absorption- and variable costing income statements that reflect the sale ofadditional 30,000 units at $0.54. Which figure in requirement 2, gross margin orcontribution margin, gave the best indication of the impact of the 30,000 additional unitson the divisions profits? Explain.4. What approach would you take to convince Eric that variable costing is a usefulmanagerial tool? Does he have any basis for his contention that a company must cover itsfull costs and that income statements should reflect all costs, not just variable costs?