P7.35 Plantwide versus departmental overhead rates; product pricing: manufacturer Constellation Peripherals Lid manufactures two different multifunction printers (MFPs) for the business market. LO7.3 Cost estimates for the two models for the current year are as follows: 7.4 Basic Advanced Direct material $800 $1 600 Direct labour (20 hours @ $30 per hour) 600 600 Manufacturing overhead* 800 800 Total $2 200 $3 000 The predetermined overhead rate Is $40 per direct labour hour. Each model MFP requires 20 hours of direct labour. The basic model requires 5 hours in department A and 15 hours in department B. The advanced model requires 15 hours in department A and 5 hours in department B. The budgeted overhead costs in these two production departments are as follows: Department A Department B Variable cost $32 per direct labour hour $8 per direct labour hour Fixed cost $400 000 $400 000 The firm's management expects to operate at a level of 20 000 direct labour hours in each production department during the current year. Required: 1. Show how the company's predetermined overhead rate was determined. 2. If the firm prices each model MFP at 10 per cent over its cost, what will be the price of each model? 3. Suppose the company were to use predetermined departmental overhead rates. Calculate the rate for each of the two production departments. Calculate the product cost of each model, using the departmental overhead rates calculated in requirement 3. 5. Calculate the price to be charged for each model, assuming the company continues to price each product at 10 per cent above cost. Use the revised product costs calculated in requirement 4. 6. Write a memo to the managing director of Constellation Peripherals making a recommendation as to whether the firm should use a plantwide overhead rate or departmental rates. Consider the potential implications of the overhead rates and the firm's pricing policy. How might these considerations affect the firm's ability to compete in the marketplace? P7.36 Activity-based costing calculations Refer to the data given in Problem P7.35. The company has implemented an activity-based costing system for LO7.5 its manufacturing overhead costs, with the activity cost pools and activity driver data below. 7.6 Activity drivers Activity Activity cost Total Basic product line Advanced product line Machine setup $ 200 000 200 setups 50 setups 150 setups Material receiving 120 000 80 000 kilograms 30 000 kilograms 50 000 kilograms Inspection 160 000 1 600 inspections 700 inspections 900 inspections Machinery-related 840 000 60 000 MH* 20 000 MH 40 000 MH Engineering 280 000 7 000 EH 3 000 EH 4 000 EH Total overhead $1 600 000 MH = machine hours. EH = engineering hours. Constellation Peripherals plans to produce 1000 units of each model MFP. Required: 1. For each activity, calculate the cost per unit of activity driver (e.g. the cost per setup). 2. Determine the total overhead to be assigned to each product line under activity-based costing. 3. Calculate the overhead assigned per unit of each type of MFP under activity-based costing. 4. Prepare a table comparing the total product cost assigned to each type of MFP using a plantwide overhead rate, departmental overhead rates and activity-based costing. (This requirement relies on the solution to Problem P7.35.)