1. P7.35

Plantwide versus departmental overhead rates; product pricing: manufacturer LO 7.3, 7.4

Constellation Peripherals Ltd manufactures two different multifunction printers (MFPs) for the business market. Cost estimates for the two models for the current year are as follows:

	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 firms management expects to operate at a level of 20 000 direct labour hours in each production department during the current year.

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Required:

1. Show how the companys 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.
4. 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.