Fixed Overhead Spending and Volume Variances, Capacity Management

Torale Company, a producer of recreational vehicles, recently decided to begin producing a major subassembly for jet skis. The subassembly would be used by Lorale's jet ski plants and also would be sold to other producers. The decision was made to lease two large buildings in two dif Ierent locations: Little Rock, Arkansas, and Athens, Georgia. The company agreed to a $11-$ycar, renewable lease contract. The plants were of the same size, and each had $10$ production lines.

New equipment was purchased for each line and workers were hired to operate the equipment.

The company also hired producton line superosors for each plant. A supervisor is capable at

drecting up sa two produetin lines per shii, Iwo shils ane run for sach plant The practical

production capacite of each plans is $300,000$ subasembles per vear. Twa standard direct labor

hours ane allowed ior cach saminog he cont for lcusing, cgpupmenr. sieprocabon.$\_$ml

$$ for a single plant are as follors the costs are assumed to be the same tor each plantio

Supervision $[10$ supervisors @ $$50,000)$

$$500,000$

Building lease fannual payment

$800000$

Equipmen depreciation annual$)$

$1100000$

Totol fixed overhead cost

$$2400000$

After beginning operations, Lorale discovered that demand for the product in the region covered by the Little Rock plant was less than anticipated. At the end of the first year, only $240,000$ units were sold. The Athens plant sold $300,000$ units as expected. The actual fixed overhead costs at the end of the first year were $$2,500,000($for each plant$).$

Required:

$1.$ Calculate a fixed overhead rate based on standard direct labor hours.

$2.$ Calculate the fixed overhead spending and volume variances for the Little Rock and Athens plants. What is the most likely cause of the spending variance? Why are the volume variances difierent for the two plants?

Suppose that from now on the sales for the Little Rock plant are expected to be no more than $240,000$ units. What actions would you take to manage the capacity costs $($fixed overhead cost$*$

$4.$ Calculate the fixed overhead cost per subassembly for each plant. Do they differ: Should they ditterz Explain. Do ABC concepts help in analyzing this issue?