Realforce Ltd. is a keyboard manufacturer. The companys vice president of

manufacturing, Luke, presented at the management meeting a proposal for automating the Assembly Department. In the proposal, he recommended the company replace the 9 direct labor workers in the Assembly Department with 3 robots. He argued that the automation would result in the elimination of direct labor costs plus the elimination of manufacturing overhead cost in the Assembly Department as Realforce currently applies manufacturing overhead on the basis of direct labor costs using a plant-wide rate. The overhead application data for the current year are presented below:

2

The average annual manufacturing overhead cost is $10,000,000; the average annual direct labor cost is $2,000,000; the average manufacturing overhead rate is 500%.

Category Keycap Department PCB Department Assembly Department

Required:

Average Annual Direct Labor $ 1,000,000 $875,000 $ 125,000

Average Annual Overhead Cost $5,500,000 $3,500,000 $1,000,000

Discuss the issue of overhead application in Realforce (please be sure to cover the following aspects in your answer and limit your answer to 500 words or less):

• Describe the problems with the companys current method for applying overhead and make recommendations on how to improve the application of overhead.

• Is it a correct statement that the manufacturing overhead cost in the Assembly Department would be reduced to zero if the automation were adopted? Explain why.

• What allocation base should be used to apply overhead in the Assembly Department if the automation were adopted?