In its second year of operations, Memories, Inc. has decided to expand the product line by producing replicas of historic buildings. These replicas will require the purchase of new building molds at a cost of $.18 per replica. Of course, new doll molds will not be required. All other materials and prices will remain the same.

The replicas require additional processing time because of the details on the buildings that limits production to 18 replicas per hour per assembly line. The replicas are not expected to affect the sales of dolls. In the second year of operations, MI expects to produce and sell about 352,800 dolls and 25,200 replicas.

Increasing production is expected to increase overhead costs by 5% in Year 2. Direct labor costs per hour are not expected to change, but 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 dolls and 25,200 replicas. Direct material costs transferred to Work-in-Process were $259,000 for dolls and $15,624 for replicas. Direct labor costs were $862,830 for the dolls and $70,010 for replicas, representing 86,283 and 7,001 direct labor hours, respectively. Actual overhead costs were $203,600.

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

Purchases of raw materials during Year 2 were $276,138 in total. Sales during Year 2 were $1,701,410 for 340,282 dolls and $121,275 for 23,100 replicas.

Required:

Can Memories, Inc. still allocate overhead in Year 2 using the same cost driver used in Year 1? If not, what appears to be the most logical cost driver to use? (Explain your answers and support your reasoning.)

Compute a predetermined overhead rate for MI in Year 2.

Using normal costing and the predetermined rate from B, compute the total manufacturing cost for 345,132 dolls and 25,200 replicas produced in Year 2, as well as the cost per doll and the cost per replica. Was overhead under- or over-applied? By how much?

Prepare a cost of goods manufactured schedule for Year 2 using actual overhead.

Prepare a cost of goods sold schedule for Year 2 using actual overhead.

Calculate MI's operating income (before taxes) for Year 2.

The marketing manager estimates that Year 3 sales will be 385,000 dolls and 30,000 replicas. The production manager is concerned about being able to produce that number of figurines without incurring significant overtime or making changes in the production process. Outline the possible problems, potential objectives, and options that MI should consider.