In its second year of operations, Big Als has decided to expand the product line by producing a veggie pizza. This new pizza will require the purchase of a veggie package from Pizza Products at a cost of $.18 per pizza. Of course, the meat package will not be required. All other ingredients and prices remain the same. The veggie toppings require additional processing time (cutting and dicing) that limits production to 18 veggie pizzas per hour per assembly line. The new veggie pizza is not expected to affect sales of the meat pizza. In the second year of operations, Big Als expects to produce about 352,800 meat pizzas and 25,200 veggie pizzas . Increasing production is expected to increase overhead costs by 5 percent in year 2. Direct labor costs per hour are not expected to change, and the number of labor hours is estimated to be 94,500. The costs of product promotion and advertising are expected to increase to $3,000 per month. All other selling and administrative costs are expected to remain the same as in year 1. Actual production in year 2 was 345,132 meat pizzas and 25,200 veggie pizzas. Direct material costs transferred to WIP were $259,000 for the meat pizzas and $15,624 for the veggie pizzas. Direct labor costs were $862,830 for the meat pizzas and $70,010 for the veggie pizzas, representing 86,283 and 7,001 direct labor hours, respectively. Actual overhead costs were $203,600. Purchases of raw materials during year 2 were $276,138. Sales during year 2 were $1,701,410 for 340,282 meat pizzas and $121,275 for 23,100 veggie pizzas. SCHEDULE OF BEGINNING AND ENDING INVENTORY AMOUNTS FOR YEAR 2. Beginning Inventory Ending Inventory Raw materials $ 1,973 $ 3,487 Work in process 0 0 Finished goods 95,000 121,645

1. Compute a predetermined overhead rate for Big Als in year 2.
2. Using normal costing and the predetermined overhead rate calculated in requirement C, compute the total manufacturing cost for the 345,132 meat and 25,200 veggie pizzas produced in year 2, as well as the cost per pizza for each type. Was overhead over- or underapplied for the year? By how much?
3. Calculate Big Als operating income (before income taxes) for year 2.
4. The marketing manager of Big Als estimates year 3 sales of 385,000 meat and 30,000 veggie pizzas. The production manager is concerned about being able to produce that number of pizzas without incurring signifi cant overtime or making changes in the production process. Outline the problem, potential objectives, and options that the management team of Big Als should consider.