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Problem 3-60 Plantwide versus Departmental Overhead Rates; Product Pricing (LO 3-1, 3-4, 3-7)

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[The following information applies to the questions displayed below.] TeleTech Corporation manufactures two different color printers for the business market. Cost estimates for the two models for the current year are as follows:

	Basic System					Advanced System
Direct material:		$	400				$	700
Direct labor (20 hours at $16 per hour)			320					320
Manufacturing overhead*			440					440
Total		$	1,160				$	1,460

*The predetermined overhead rate is $22 per direct-labor hour. Each model of printer requires 20 hours of direct labor. The basic system requires 5 hours in department A and 15 hours in department B. The advanced system requires 15 hours in department A and 5 hours in department B. The overhead costs budgeted in these two production departments are as follows:

	Department A					Department B
Variable cost		$	16	per direct-labor hour		$	4	per direct-labor hour
Fixed cost		$	240,000			$	240,000

The firms management expects to operate at a level of 20,000 direct-labor hours in each production department during the current year. (This estimate is based on the practical capacity of each department.)

2. If the firm prices each model of color printer at 10 percent over its cost, what will be the price of each model?

	Basic System	Advanced System
Price

3. Suppose the company were to use departmental predetermined overhead rates. Calculate the rate for each of the two production departments.

	Department A		Department B
Predetermined overhead rate		per direct labor hour		per direct labor hour

4. Compute the product cost of each model using the departmental overhead rates calculated in requirement (3).

	Basic System	Advanced System
Product cost

5. Compute the price to be charged for each model, assuming the company continues to price each product at 10 percent above cost. Use the revised product costs calculated in requirement (4).

	Basic System	Advanced System
Price