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Re Explain how shaving 5% off the estinated direct labour-boun in the base fir de rede mined overhead rate usually results in a big boost In operating income at fiscal year 2. Should Carrigan go along with the end of managers tequest to reduce the direct rate cotmputation to 105000 direct hours? predeterminegenermana CASE 5:32 Single versus Maltiple Overhend Application Rates 103 1oS Foster Appliance Repair has developeda reputation over many years of ity, reliable repair services at a fair price. The c tion (run by Victor Foster and his wife Saly Jonesi to a mach larger compaty egloyag Foster and Jones as well as four skilled repair pensonnel and two service technicians ken manages the front office ind prepares all RecentlyJones has noticeddecline in profits generated by the repair business. Foster bai also noticed some deciline in the number of repairs completed over the past few months Hi belleves this reduction may be due to Increased competition from a new repair shop in th area. Since pricing is based to a large degree on the cost of repates. Foster asked joon spend some time analyring how repair costs were charged to jobs to beter undenstand fe problem. He was quick to remind Jones that he was conmmitted to keeping all personndl a xed salaries since he belleves this allows him to keep good employess and encourages loyalty to the company versus Maltiple Overhead Application Rates 1O3 Los proviling high qu ompany has grown from a two-pensos gpes recceds for the compant jones collected the following information about the costing system Direct materials used in repairs are charged directly to the job The four repair personnel are paid a flxed salary of $50.000 per yeat and the two techei cians are paid a fixed salary of 138000 per year. Pomes estimates that each of the six repair personnel works 1750 hours per year os customer jobs Other budgeted indirect support costs for the year lieg. rent insurance utilitics wppl repair van maintenance repair van depreclation) toeal $178450 Including Fosters n joness salaries The price for each job is caleulated on a cost-plus basis Castomers pay the total cost to complete the job plus a markup of s . The total cost for each job is calculated as follows total direct material cost plas the shog rate' x number of sepair hours to complene the job. The shop rate is applied so all types repair jobs The shop rabe is calculaned as the sum of the repair personnel salaries pla budgeted indirect support costs for the year dixided by the estimated total hours to be worked on customer jobs for the year ites noted that about 65% of total indirect costs related to complet repairs over the lat of years, while the oder 35% of total indirect costs related to simpler repairs. Eves n customer jobs by rxpair personnel and techsi cians was related to complex repairs while the other half was related to While Jones believed this was impoetant information. she realised it w about half of the total time as not taken Int account when calcelating the owrrall shop rate foe the year Reguired -the above information gathered by hered by jones about the proportion of complex and simple re te different shop rates that could be applied to comples and . Calculate the shop rate for the year baar a Use the inormation gat dmaple re poi 2completedby fotence ieai lat month The isb cost t Comaes cost of direct mserials plas 6 hours of labour time x the shop rate indiaer alate the t 3. Comsider Job 1246 total price charged to the cuitamet assuming a 10% markup on cost aAing a little more digging Jones was ablke to deterMine that 2 of the 6 hours spent on lob 1246 were related to complex repairs while 4 of the hours spent on the k were related to simple repairs. Uae this information and the two shop rates calculated in (2) above to estimale the price that would hanve been charged for job 1246 undert this new aystem Calcelate t A Uing all of the information gathered to this point explain why Foster Appliance Repai