SPS manufactures a variety for solar power. At the start of 2018, the company estimated it would incur $10,000,000 of direct labor cost, $30,000,000 of direct material cost, and $40,000,000 of manufacturing overhead ($5,000,000 of which is variable; $35,000,000 is fixed.)

Overhead is applied to jobs based on direct labor hours at a rate of $100 per direct labor hour. At SPS, highly skilled employees are oaid $50 per hour. Unskilled employees get $15 per hour. In general, the jobs that require highly skilled employees are more complex and require more support costs such as costs related to setting up equipment for production. The weighted average direct labor rate is $20 per hour. During 2018, sales were unexpectedly low due to increased competition from a Swiss firm that entered the market with aggressive pricing. In particular, SPS didnt seem to be price competitive on jobs that call for mostly less skilled work. The VP asked his assistant to analyze costs related to recent bids for "simple" and "complex" jobs. The result:

Job 358 (Simple)

Direct Material $40,000

Direct Labor (210hrs x $20) = 4,200

Overhead (210hrs x $100) = 21,000

Total = $65,000

Job 265 (Complex)

Direct Material. $60,000

Direct Labor (200hrs x $20) = 4,000

Overhead (200hrs x $100) = 20,000

Total = $84,000

As soon as he saw the analysis, Phil understood the problem. Explain why overhead is potentially distorted. Should SPS lower prices to meet the competition from the Swiss firm? In answering this question, take into account the companys cost structure.

Solar Power Systems SPS manufactures a variety of equipment for solar power. At the start of 2018, the company estimated it would incur $10,000,000 of direct labor cost, $30,000,000 of direct material cost, and $40,000,000 of manufacturing overhead ($5,000,000 of which is variable; $35,000,000 fixed.) Overhead is applied to jobs based on direct labor hours at a rate of $100 per direct labor hour. At SPS, highly skilled employees are paid $50 per hour. Unskilled employees get $15 per hour. In general, the jobs that require highly skilled employees are more complex and require more support costs such as costs related to setting up equipment for production. The weighted average direct labor rate is $20 per hour During 2018, sales were unexpectedly low due to increased competition from a Swiss firm that entered the market with aggressive pricing. In particular, SPS didn't seem to be price competitive on jobs that called for mostly less skilled work. Milt Romney, plant manager, talked to Phil Ryan, VP of Finance: "What's going on here? We're competitive on high end jobs that require a lot of support in terms of engineering, material handling, and setting up equipment but we can't compete on relatively simple jobs where, in my opinion, we're really efficient." The VP asked his assistant to analyze costs related to recent bids for "simple" and "complex" jobs. The result: Job 358 (Simple) Job 365 (Complex) $40,000 $60,000 4,200 Direct Material Direct Labor 210 hours x $20 Overhead 210 hours x $100 Total 4,000 Direct Material Direct Labor 200 hours x $20 Overhead 200 hours x $100 Total 21,000 $65,200 20,000 $84.000 As soon as he saw the analysis, Phil understood the problem. Explain why overhead is potentially distorted. Should SPS lower prices to meet the competition from the Swiss firm? In answering this question, take into account the company's cost structure