Pluton makes particular plastics for sale to the public and the government. Basic cost data for a 100-pound drum of one particular product called Xentra appears below:

Variable factory overhead is estimated to be $1,200,000 per month, when 1,000,000 pounds of various products are produced. The plant employs 20 chemical workers who typically work 175 hours each per month and are paid $24 per hour. Other workers are classified as indirect and are included in fixed overhead. The highly automated plant typically runs 21,000 machine hours per month. The preparation of one 100-pound batch of Xentra needs ten minutes of direct labor and 75 minutes of machine time. Fixed manufacturing overhead totals $3,500,000 per month. Forty percent of the fixed manufacturing overhead is labor-related costs and the balance is machine-related costs.

1. A government agency wants to purchase 200 drums of Xentra at cost plus a flat fee. Which allocation method gives the profit-maximizing result?

Multiple Choice

A. Allocating overhead per 100-pound drum

B. Allocating overhead per machine hour

C. Allocating overhead per direct labor hour

D. Allocating overhead per pound

E. None of the choices are correct

2. Assuming Pluton selects the cost allocation method as per pound, how much will profits increase on this order compared with allocating overhead per drum (the current system)?

Multiple Choice

A. No Change

B. Change by $31,666

C. Change by $17,571

D. Change by $6,381

E. None of the choices are correct

3. Assuming normal production levels, what is the full cost per drum?

Multiple Choice

A. $1,725.00

B. $1,700.73

C. $1,625.00

D. $1,609.00

E. None of the choices are correct

Chemical Xeta, gals Chemical Thenta, gals Base material, pound 100-lb lined drum Qty Cost 15 $25.00 35 $27.50 20 $ 1.00 1 $51.83