The VP of Sales at MTCL things he can improve results by adding a new product line - Wrench Sets (Appendix 2). He is certain the wrench sets will make money, but the cost and profit projections aren't supporting his claim. The VP of Manufacturing is concerned about scheduling and doesn't know how she is going to manage production, especially if the wrench sets are added. She tells you, "We've been working at close to our capacity, using 170,000 of the available 180,000 machine hours, and costs have been right on target. It's the scheduling of work on machines that is causing me the biggest headache. We're barely managing to keep up with the sales orders, but with any increase in sales, we'll end up with backorders." Required: 1) MTCL currently allocates non-direct costs to product lines based on a variety of drivers (Appendix 1). Melissa would like you to review the current allocations. a. Please advise whether the current allocations for Manufacturing Overhead Cost, Variable Selling & Admin Cost, and Fixed Selling & Admin Cost are appropriate. If they are not appropriate, suggest improvement(s) and explain how the changed allocations would be better. (5 marks) b. Based on (a), provide the updated full cost per unit for each of the current product lines. (16 marks) 2) Melissa would like to know whether the wrench sets have the potential to be profitable. Prepare an incremental contribution analysis to help Melissa with the quantitative aspect of this decision. (11 marks) 3) The VP of Manufacturing would like your recommendation on the best way to utilize the production capacity given the budgeted sales (including wrench sets). (13 marks) Appendix 1 Master Tool Corporation Limited Standard Cost Summary For the year ending July 31, 20x2 Appendix 2 Proposed Wrech set 15-cm pliers 20-cm pliers Economy pliers 1. Manufacturing overhead is allocated to products at a predetermined rate based on direct labour in dollars. $2.75 $10 Per dollar of labour hour costs Budgeted overhead Budgeted direct labour $2,975,000* $297,500 0.65 Standard unit costs: Direct materials Direct labour Overhead (Note 1) Total manufacturing costs Variable selling & admin costs (Note 2) Fixed selling & admin costs (Note 3) Total cost Labour hours per unit Machine hours per unit $1.10 0.5 5 6.6 0.35 $3.35 0.75 7.5 11.6 1.1 0.46 $13.16 0.06 1 $4.00 1 10 $15.00 1.1 6.5 9.9 0.55 0.4 $10.85 0.05 0.25 *90% of total overhead is composed of depreciation, regular maintenance, related salaries, and other fixed manufacturing costs. The remaining 10% of overhead costs are variable and include the costs of operating the machines. 0.26 0.46 $16.56 $7.21 0.04 0.25 Budgeted fixed selling & admin costs Budgeted total manufacturing costs $177,680 $4,442,000 4% of manufacturing costs 0.5 Unit sales Selling price per unit 100,000 $7.50 300,000 $12.00 70,000 $14.50 40,000 $14.00 Variable selling and administrative costs consist entirely of sales commissions. Commission amounts per unit were negotiated with the salespeople two years ago. Fixed selling and administrative costs are allocated to products at a predetermined rate based on total manufacturing costs. The VP of Sales at MTCL things he can improve results by adding a new product line - Wrench Sets (Appendix 2). He is certain the wrench sets will make money, but the cost and profit projections aren't supporting his claim. The VP of Manufacturing is concerned about scheduling and doesn't know how she is going to manage production, especially if the wrench sets are added. She tells you, "We've been working at close to our capacity, using 170,000 of the available 180,000 machine hours, and costs have been right on target. It's the scheduling of work on machines that is causing me the biggest headache. We're barely managing to keep up with the sales orders, but with any increase in sales, we'll end up with backorders." Required: 1) MTCL currently allocates non-direct costs to product lines based on a variety of drivers (Appendix 1). Melissa would like you to review the current allocations. a. Please advise whether the current allocations for Manufacturing Overhead Cost, Variable Selling & Admin Cost, and Fixed Selling & Admin Cost are appropriate. If they are not appropriate, suggest improvement(s) and explain how the changed allocations would be better. (5 marks) b. Based on (a), provide the updated full cost per unit for each of the current product lines. (16 marks) 2) Melissa would like to know whether the wrench sets have the potential to be profitable. Prepare an incremental contribution analysis to help Melissa with the quantitative aspect of this decision. (11 marks) 3) The VP of Manufacturing would like your recommendation on the best way to utilize the production capacity given the budgeted sales (including wrench sets). (13 marks) Appendix 1 Master Tool Corporation Limited Standard Cost Summary For the year ending July 31, 20x2 Appendix 2 Proposed Wrech set 15-cm pliers 20-cm pliers Economy pliers 1. Manufacturing overhead is allocated to products at a predetermined rate based on direct labour in dollars. $2.75 $10 Per dollar of labour hour costs Budgeted overhead Budgeted direct labour $2,975,000* $297,500 0.65 Standard unit costs: Direct materials Direct labour Overhead (Note 1) Total manufacturing costs Variable selling & admin costs (Note 2) Fixed selling & admin costs (Note 3) Total cost Labour hours per unit Machine hours per unit $1.10 0.5 5 6.6 0.35 $3.35 0.75 7.5 11.6 1.1 0.46 $13.16 0.06 1 $4.00 1 10 $15.00 1.1 6.5 9.9 0.55 0.4 $10.85 0.05 0.25 *90% of total overhead is composed of depreciation, regular maintenance, related salaries, and other fixed manufacturing costs. The remaining 10% of overhead costs are variable and include the costs of operating the machines. 0.26 0.46 $16.56 $7.21 0.04 0.25 Budgeted fixed selling & admin costs Budgeted total manufacturing costs $177,680 $4,442,000 4% of manufacturing costs 0.5 Unit sales Selling price per unit 100,000 $7.50 300,000 $12.00 70,000 $14.50 40,000 $14.00 Variable selling and administrative costs consist entirely of sales commissions. Commission amounts per unit were negotiated with the salespeople two years ago. Fixed selling and administrative costs are allocated to products at a predetermined rate based on total manufacturing costs