Question III

Johns Autoworks (JA) manufactures three models of cars a Sedan, an SUV and a truck. The budgeted revenues and costs of the three products are as follows:

Product Sedan SUV Truck

Sales $5,000,000 $4,000,000 $6,000,000

Variable Costs

Direct Material 1,500,000 1,500,000 2,500,000

Direct Labor 500,000 1,000,000 1,000,000

Variable Overhead (VOH) is allocated at 50% of Direct Labor costs.

Total fixed expenses (unavoidable) by function for the entire company:

Salaries of executive staff $1,200,000

Selling Expenses $1,000,000

Administrative Expenses $1,800,000

The fixed expenses are allocated to the three products using budgeted revenues.

a. What are the Variable Overhead costs allocated to the three products?

Sedan________ SUV_________ Truck________

b. Does the Variable Overhead Rate change with changes in volume?

c. What are the Fixed Overhead costs allocated to the three products?

Sedan________

SUV_________

Truck________

d. Is the cost driver Budgeted Revenue dollars for fixed expenses an insulating or non-insulating cost driver? Explain the reason for your answer.

e. Calculate the Gross Margin for the SUV division (3 points). Should JC drop the SUV product? Explain your answer with supporting calculations.

f. Johns Autoworks is considering eliminating SUVs and adding Minivans. Minivans will have the same variable costs as the SUVs (both materials, direct labor and variable overhead). Minivans though need an additional $2,000,000 of incremental fixed costs. What must be the minimum incremental dollars that Minivans should bring in so that Johns Autoworks is indifferent between producing SUVs and Minivans? Note: This is not a break-even question but an incremental question.