COOP AUTOMOTIVE Coop Automotive Corporation manufacturers a variety of parts for the automotive Industry. The company uses a job order costing system with a plantwide predetermined overhead rate base on direct labor hours. On December 10,2021, the company's controller made a preliminary estimate of the predetermined overhead rate for 2022. The new rate was bade on the estimated total manufacturing overhead cost of $2,475,000 and the estimated 52,000 total direct labor hours for 2022 $2,475,000 Predetermined overhead rates 52.000 hours $47.60 per direct labor hour This new predetermined overhead rate was communicated to top managers in a meeting on December 11. The rate did not cause any comment because it was within a few pennies of the overhead rate that had been used during 2021. One of the subjects discussed at the meeting was a proposal by the production manager to purchase an automated milling machine center built by Central Robotics The president of Coop Automotive, Kevin Reynolds, agreed to meet with the regional sales representative from Central Robotics to discuss the proposal On the day following the meeting. Mr. Reynolds met with Jay Warner, Central Robotics' sales representative. The following discussion took place: Reynolds: Larry Winter, our production manager, asked me to meet with you since he is interested in installing an automated milling machine center. Frankly, I am skeptical. You're going to have to show me this isn't just another expensive toy for Larry's people to play with. Warner: That shouldn't be too difficult, Mr. Reynolds. The automated milling machine center has three major advantages. First, it is much faster than the manual methods you are using. It can process about twice as any parts per hour as your present milling machine Second, it is much more flexible. There are some up-front programming costs, but once those have been incurred, almost no setup is required on the machines for standard operations. You just punch in the code of the standard operation, load the machine's hopper with raw material, and the machine does the rest. Reynolds: Yeah, but what about cost? Having twice the capacity in the milling machine area won't do us much good. That center is idle much of the time anyway. Warner: I was getting there. The third advantage of the automated milling machine center is lower cost Larry Winters and I looked over your present operations, and we estimated that the automated equip ment would eliminate the need for about 6,000 direct labor-hours a year. What is your direct labor cost per hour? Reynolds: The wage rate in the milling area averages about $21 per hour. Fringe benefits raise that figure to about $30 per hour. Warner: Don't forget your overhead. Reynolds : Next year the overhead will be about $48 per hour. Warner: So including fringe benefits and overhead, the cost per direct labor-hour is about $78. Reynolds: That's right Warner: Since you can save 6,000 direct labor hours per year, the cost savings would amount to about $468,000 a year. Reynolds: That's pretty impressive, but you aren't giving away this equipment are you? Warner: Several options are available, including leasing and outright purchase. Just for comparison purposes, our 60-month lease plan would require payments of only $300,000 per year. Reynolds: Sold! When can you install the equipment? COOP AUTOMOTIVE Shortly after this meeting, Mr. Reynolds informed the company's controller of the decision to Tease the new equipment, which would be installed over the Christmas vacation period. The controller realized that this decision would require a recomputation of the predetermined to overhead rate for the year 2022 since the decision would affect both the manufacturing overhead and the direct labor-hours for the year. After talking with both the production manager and the sales represen- of$ 300,000, the new machine would also require a skilled technician/programmer who would tative from Central Robotics, the controller discovered that in addition to the annual lease cost" have to be hired at a cost of $45,000 per year to maintain and program the equipment. Both of these costs would be included in factory overhead. There would be no other changes in total manu- facturing overhead cost, which is almost entirely fixed. The controller assumed that the new machine would result in a reduction of 6,000 direct labor-hours for the year from the levels that had initially been planned. When the revised predetermined overhead rate for the year 2022 was circulated among the company's top managers, there was considerable dismay. Required: 1. Recompute the predetermined rate assuming that the new machine will be installed. 2. Suppose Coop entered into a contract to manufacture and assemble a new suspension system for an automotive company. Assume that labor per suspension system with the automated milling center is 32 hours and that it is 36 hours without the center. Direct materials is $670 both with and without the center. Compute the cost to manufacture and assemble the new suspension system with the automated milling center and without the automated milling center. COOP AUTOMOTIVE Coop Automotive Corporation manufacturers a variety of parts for the automotive Industry. The company uses a job order costing system with a plantwide predetermined overhead rate base on direct labor hours. On December 10,2021, the company's controller made a preliminary estimate of the predetermined overhead rate for 2022. The new rate was bade on the estimated total manufacturing overhead cost of $2,475,000 and the estimated 52,000 total direct labor hours for 2022 $2,475,000 Predetermined overhead rates 52.000 hours $47.60 per direct labor hour This new predetermined overhead rate was communicated to top managers in a meeting on December 11. The rate did not cause any comment because it was within a few pennies of the overhead rate that had been used during 2021. One of the subjects discussed at the meeting was a proposal by the production manager to purchase an automated milling machine center built by Central Robotics The president of Coop Automotive, Kevin Reynolds, agreed to meet with the regional sales representative from Central Robotics to discuss the proposal On the day following the meeting. Mr. Reynolds met with Jay Warner, Central Robotics' sales representative. The following discussion took place: Reynolds: Larry Winter, our production manager, asked me to meet with you since he is interested in installing an automated milling machine center. Frankly, I am skeptical. You're going to have to show me this isn't just another expensive toy for Larry's people to play with. Warner: That shouldn't be too difficult, Mr. Reynolds. The automated milling machine center has three major advantages. First, it is much faster than the manual methods you are using. It can process about twice as any parts per hour as your present milling machine Second, it is much more flexible. There are some up-front programming costs, but once those have been incurred, almost no setup is required on the machines for standard operations. You just punch in the code of the standard operation, load the machine's hopper with raw material, and the machine does the rest. Reynolds: Yeah, but what about cost? Having twice the capacity in the milling machine area won't do us much good. That center is idle much of the time anyway. Warner: I was getting there. The third advantage of the automated milling machine center is lower cost Larry Winters and I looked over your present operations, and we estimated that the automated equip ment would eliminate the need for about 6,000 direct labor-hours a year. What is your direct labor cost per hour? Reynolds: The wage rate in the milling area averages about $21 per hour. Fringe benefits raise that figure to about $30 per hour. Warner: Don't forget your overhead. Reynolds : Next year the overhead will be about $48 per hour. Warner: So including fringe benefits and overhead, the cost per direct labor-hour is about $78. Reynolds: That's right Warner: Since you can save 6,000 direct labor hours per year, the cost savings would amount to about $468,000 a year. Reynolds: That's pretty impressive, but you aren't giving away this equipment are you? Warner: Several options are available, including leasing and outright purchase. Just for comparison purposes, our 60-month lease plan would require payments of only $300,000 per year. Reynolds: Sold! When can you install the equipment? COOP AUTOMOTIVE Shortly after this meeting, Mr. Reynolds informed the company's controller of the decision to Tease the new equipment, which would be installed over the Christmas vacation period. The controller realized that this decision would require a recomputation of the predetermined to overhead rate for the year 2022 since the decision would affect both the manufacturing overhead and the direct labor-hours for the year. After talking with both the production manager and the sales represen- of$ 300,000, the new machine would also require a skilled technician/programmer who would tative from Central Robotics, the controller discovered that in addition to the annual lease cost" have to be hired at a cost of $45,000 per year to maintain and program the equipment. Both of these costs would be included in factory overhead. There would be no other changes in total manu- facturing overhead cost, which is almost entirely fixed. The controller assumed that the new machine would result in a reduction of 6,000 direct labor-hours for the year from the levels that had initially been planned. When the revised predetermined overhead rate for the year 2022 was circulated among the company's top managers, there was considerable dismay. Required: 1. Recompute the predetermined rate assuming that the new machine will be installed. 2. Suppose Coop entered into a contract to manufacture and assemble a new suspension system for an automotive company. Assume that labor per suspension system with the automated milling center is 32 hours and that it is 36 hours without the center. Direct materials is $670 both with and without the center. Compute the cost to manufacture and assemble the new suspension system with the automated milling center and without the automated milling center