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Generator X Case Short Answer Somethings wrong! Generator X Company produces two generators. The Excel has been manufactured for more than 20 years and it

Generator X Case

Short Answer

Somethings wrong! Generator X Company produces two generators. The Excel has been manufactured for more than 20 years and it sells for $900. The Power is a new model developed and marketed approximately two years ago. It sells for $1,140. Based on the information in the companys income statement for 20x1, upper management wants to downscale and spend available marketing dollars on the Power while beginning to phase out the production of the Excel.

Generator X Company

Income Statement

For the year ended December 31, 20x1

Power

Excel

Total

Sales

$ 4,560,000

$19,800,000

$24,360,000

Cost of goods sold

3,192,000

12,540,000

15,732,000

Gross Profit

$ 1,368,000

$ 7,260,000

$ 8,628,000

Selling and administrative expenses

978,000

5,830,000

6,808,000

Net Income

$ 390,000

$ 1,430,000

$ 1,820,000

Units Produced and sold

4,000

22,000

Net Income per unit sold

$97.50

$65.00

The standard unit costs of the Power and Excel generators are as follows:

Power

Excel

Direct Materials

$ 584

$ 208

Direct Labor

Power(3.5 hr. X $12)

42

Excel(1.5 hr. X $12)

18

Machine usage
Power(4 hr. X $18)

72

Excel(8 hr. X $ 18)

144

Manufacturing overhead*

100

200

Total Standard cost

$ 798

$ 570

*Manufacturing overhead was applied on the basis of machine hours at a predetermined rate of $ 25 per hour. Note: We have learned that direct costs include direct materials and direct labor. For our purposes in this problem, you should also assume that Machine usage is a direct cost. Wait a minute!...before we do anything rash: Generator Xs controller (Western New England MSA graduate) wants to try one more thing. She instructs her accountants to gather relative information so that her department may try allocating manufacturing overhead using activity-based costing and activity-based management. The following info was gathered:

Number of Events

Activity Center

Cost Driver

Traceable Cost

Power

Excel

Total

Soldering # of solder joints

$ 942,000

385,000

1,185,000

1,570,000

Shipments # of shipments

860,000

3,800

16,200

20,000

Quality control # of inspections

1,240,000

21,300

56,200

77,500

Purchase Orders # of orders

950,400

109,980

80,100

190,080

Machine Power machine hours

57,600

16,000

176,000

192,000

machine setups # of setups

750,000

14,000

16,000

30,000

Total traceable costs

$4,800,000

1.

What is the problem to be solved?

2 .

Identify the relevant information needed to solve this problem.

3.

What are the alternative methods commonly utilized to allocate manufacturing overhead costs to products? How are they different? Which method might be better in this situation?

4.

Recalculate the cost of these products. Recalculate the the profit for each of these products. Calculations should be presented in the Income Statement format initially shown. Show calculations in total as well as on a per unit basis. Should Generator X Company stop production of the Excel Generator. Justify your decision.

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