Question 05 (20 Marks) Catherine Company manufactures a product that is available in both a Universal model and a Premium model. The company has manufactured the regular model for years. The Premium model was introduced several years ago to tap a new segment of the market. Since introduction of the Premium model, the company's profits have steadily declined, and management has become increasingly concerned about the accuracy of its costing system. Sales of the Premium model have been increasing rapidly. Manufacturing overhead is assigned to products on the basis of total direct labor dollars. For the current year, the company has estimated that it will incur $6,000,000 in manufacturing overhead cost and produce 15,000 units of the Premium model and 120,000 units of the Universal model. The Premium model requires 1.8 hours of direct labor time per unit, and the Universal model requires 0.95 hours. Selling price, Material and labor costs per unit are as follows: Model Premium Selling Price 257 Direct Materials 157 Direct Labor 16 Required: 1. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate. Using this rate and other data from the problem, Universal 164 111 8 a. Determine the unit product cost of each model. b. Compute product margin for Premium and Universal model. 2. Management is considering using activity-based costing to apply manufacturing overhead costs to products for external financial reports. The activity-based costing system would have the following four activity cost pools: Activity Cost Pool Purchase Orders Scrap/rework Orders Product Testing Machine Related Total Overhead Cost Activity Measures No Of Purchase orders No of scrap/rework orders Number of tests Machine - Hours Estimated Overhead Costs 255000 645000 1358000 3742000 6000000 Activity Measures No Of Purchase orders No of scrap/rework orders Number of tests Machine - Hours Premium 400 500 6000 Expected Activity Universal 800 400 9000 30000 Total 1200 900 15000 50000 20000 Compute the predetermined overhead rates (i.e., activity rates) for each of the four activity cost pools. 3. Using the predetermined overhead rates computed in part (2) above, do the following: a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit for each model. b. Compute the unit product cost of each model (materials, labor, and manufacturing overhead). c. Compute product margin for each product. 4. From the data you have developed in (1) through (3) above, identify factors that may account for the company's declining profits
