Catherine Company manufactures a product that is avalable in both a Universal model and a Premium model. The company has manufactured the regular model for years. The Premium model was introduced several years ago to tap a new segment of the market. Since introduction of the Premium model, the company's profts have steadiy decined, and management has become increasingly concerned about the accuracy of its costing system. Sales of the Premium model have been increasing rapidly. Manufacturing overhead is assigned to products on the basis of total direct labor dollars. For the current year, the company has estimated that I will incur $6,000,000 in manufacturing overhead cost and produce 15,000 unts of the Premium model and 120,000 units of the Universal model. The Premium model requires 1.8 hours of direct labor time per unit, and the Universal model requires 0.95 hours. Selling price, Material and labor costs per unit are as folows: Model Universal 164 111 8 Premium Seling Price 257 Direct Materials 157 Direct Labor 16 Required: 1. Using direct labor hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overheat rate. Using this rate and other data from the problem, a. Determine the unt product cost of each model b. Compute product margh for Premium and Universal model 2. Management is considering using activity-based costng to apply manufacturing overhead costs to products for external financial reports. The activky-based costing system would have the folowing four activity cost pools: Activity Cost Pool Activity Measures Purchase Orders No of Purchase orders Scrap/rework Orders No of scrap/rework orders Product Testing Number of tests Machine Related Machine - Hours Total Overhead Cost Estimated Overhead Costs 255000 645000 1358000 3742000 6000000 400 500 6000 20000 Total 1200 900 15000 50000 Expected Activity Activity Measures Premium Universal No Or Purchase orders 800 No of scrap/rework orders 400 Number of tests 9000 Machine - Hours 30000 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 appled to each model usng the actity-based costing system. After these totals have been computed, detennne the amount of manufacturing overhead cost per unt for each model b. Compute the unt product cost of each model (materials, labor, and manufacturing overhead). c. Compute product margin for each product. 4. From the data you have devebped in (1) through (3) above, identity factors that may account for the company's declining prufts
