If,as Adam says ,neither $ 11.74 nor $ 6.37 represents "the cost " of the new timer. How would a better figure be computed?

a number of wiring and Tom had checked on available capacity before computing tus space for the timer's assembly had just become available because the compa Variable costs for the new timer. having one warehouse for finished goods at the plant, to tow warehouses, one in Pennsylvania Selling. General and Administration (15% of and the other in Texas, Making the warehouse into an assembly area would require some tables, cost) lighting, and small tools but no major capital expenditure. About $20,000 ought to cover it, Tom 9.79 0.58 Adam asked Tom to show his figures to Ross. On the seeing the $9 28 production cost, Ross did 6.37 Profit (10% of cost) thought. Factory price the following rough calculation using normal mark-ups to see what this cost might indicate for a Wholesale, Retail and Distribution (50% of $12.74 Selling Price) retail selling price. Estimated retail selling price $9.28 Total manufacturing cost Selling, General and Administration (15% of 1.39 cost At a fictory price of $6.37, Ross figured they could 50:000 timers. He figured there should be a Total Costs $38,000 advertising budget that would be spent regardless of sales volume. He figured the $0.76 1 07 Profit (10% of cost) per unit for general administrative and selling expense would just cover the advertising cost and 11.74 Factory Price Wholesale, Retain and Distribution (50% of could be allocated to advertising, since other SG&A costs would be fixed. When Ross showed his proposal to Adam, the latter flatly disagreed with the idea of cutting 11.74 Selling Price) 23.48 Estimated Retail Selling Price overhead. "You start doing that," he said, "and pretty soon you've got lots of volume and no profit. You can't just wave your calculator like a wand over the numbers and have a product "Holy Smokes," said Ross to himself, "we'll never sell any at that price." He knew that the actually cost less. Furthermore, I think you haven't figured in the value of the options. There's no another timer like this on the market. I think we can put a factory price of $1 1.74 on it, and similar model by the closest competitor was selling at $15.98, and others were not more than customers will be eager to buy it at $23.48." dollar or two away from that. He studied the controller's numbers. "Tom," he said, "isn't most of this overhead fixed? You Tom, who had heard most of the discussion, said he thought the $1 1.74 factory price was a much have used a plant-wide rate for as long as I can remember, and that seems to have worked OK. better idea. "Look," he said to Ross," if your breakdown of fixed and variable costs is right -and But if we are just adding on a little fancy assembly stuff to sell more timing mechanisms, that I think it is probably OK for the short run then we'll only need to sell some smaller number of isn't really going to increase our overhead, is it?" units at $1 1.74 to be as well off as we would be with your plan." "Well, yes and no," said Tom. "Any one increment in volume won't necessarily increase "Well," said Adam, "That may be right, but the more I look at this the more it seems to me that a little knowledge is a dangerous thing here. I don't think we really know how much the new timer overhead by 300 percent of the direct labor that increment, but somewhere al somewhere along line, overhead is going to increase." To explain what overhead consisted of. Tom showed Ross the schedule is going to cost either in the short run or the long run." hown in Exhibit 2. ss asked Tom a few questions about the list of overhead costs and then computed his own ures, shows as the right-hand column in Exhibit 2. He concluded that only about $1.59 of the I dididza Exhibit 2 is brothovo boqx Overhead item abilqqua 10ds 1 1501il |boandour % of Direct Labor Ross's Est asA mainsdooM Supplementary compensation for direct labor Variable SO.0 es.0 II.I zhisq boesound (Social Security, holidays, insurance etc.) 35% SO.0 noitsonde Supervision (including supplemental 15% 50.0 SI.0 81.0 gainidosM compensation) ez.0 II. I vidmozz/ Indirect labor (including supplemental 30% asA Isto' compensation) of nowibb Machine maintenance 55% 15mit won sis Machine depreciation 40% AS.0 0 35% E0.0 Manufacturing engineering noHEorIC Plant administration (including supplemental 40% 1.0 SE. I compensation) 10% 20.A vidrus 1.0 RE. Electricity 58.2 PS.0 2noitibbs L CI.0 ZE. I Occupancy cost 40% be. 19miT well I Total as percent of direct labor 500% eu slod gaillib bas ,esosiq mot } gaiqmste 29qsde wo gnidonuq asw how noin (Explanation: This says, for example, that total supervision cost of all departme .29midosm botsTogo basi bas oil was expected to be 15% of the total direct labor cost for the year.) 289g effi exem of ziobring bas andosm grillim 29disl bozu anoilsisqo gninid: Ross's computation amainsdoom boot oitsmotus beau saodi to vnsM .esons19lot 19q01q rhiw . Total direct labor per timer=$1.94 (shown in Exhibit 1) 82% of $1.94= about $1.59 Therefore, incremental overhead per timer made would be $1.59