This is a Management Accounting question.

You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. It is your first day on the job and a Manager asks you for some help with a client in the aerospace sector. Eager to please on your first day, you head over to Galaxy Incorporated and sit down with the Executive Vice President to obtain more information.

"That R2D2 model is such a stinker! I think it's time to cut back its production and shift our resources toward the new BB8 model," said Justin Medakiewicz, Executive VP of Galaxy Incorporated. "Take a look at this Income Statement I've received from accounting. The BB8 is generating over eight times as much profit as the R2D2 on one-sixth of the unit sales. I'm convinced that we should focus on the BB8 going forward." The year-end statement which Justin was referring to is shown below. (see attachment)

You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. It is your first day on the job and a Manager asks you for some help with a client in the aerospace sector. Eager to please on your first day, you head over to Galaxy Incorporated and sit down with the Executive Vice President to obtain more information. \"That R2D2 model is such a stinker! I think it's time to cut back its production and shift our resources toward the new BB8 model,\" said Justin Medakiewicz, Executive VP of Galaxy Incorporated. \"Take a look at this Income Statement I've received from accounting. The BB8 is generating over eight times as much profit as the R2D2 on onesixth of the unit sales. I'm convinced that we should focus on the BB8 going forward.\" The yearend statement which Justin was referring to is shown below. Model Total R2D2 BB8 $11,125,000 $9,000,000 $2,125,000 Cost of Goods Sold 6,900,000 5,490,000 1,410,000 Gross Margin 4,225,000 3,510,000 715,000 Less: Selling and Administrative Expenses 3,675,000 3,450,000 225,000 Operating Income $550,000 $60,000 $490,000 30,000 5,000 Sales Number of Units Produced and Sold \"The numbers sure look that way,\" replied Melissa Montoro, the company's sales manager. \"But why isn't the competition interested in replicating the BB8? I know we've been producing the model for only three years, but I'm surprised that more of our competitors haven't recognized what a cash cow it is.\" \"I think it's our new automated plant,\" replied Justin. \"Now it takes only two direct labour hours to produce a unit of the R2D2 and three direct labour hours to produce a unit of the BB8. That's considerably less than it used to take us.\" \"I agree that automation is very beneficial,\" replied Melissa. \"I suppose that's how we're able to hold down the price of the BB8. Trekkie Corporation in the UK tried to bring out a BB8 but discovered they couldn't come close to matching our price. But Trekkie is killing us on the R2D2 by undercutting our price with some of our best customers. I suppose they'll pick up all of our R2D2 business if we move out of that market. But who cares? We don't even have to advertise the BB8; it just seems to sell itself.\" \"My only concern about automation is how our manufacturing overhead rate has shot up,\" said Justin. \"Our total manufacturing overhead cost is $2,700,000. That comes out to be a hefty amount per direct labour hour, but Timothy down in accounting has been using direct labour hours as the base for computing overhead rates for years and doesn't want to change. I don't suppose it matters as long as costs get assigned to products.\" \"I've never understood that debit and credit stuff,\" replied Melissa. \"But I think you've got a problem in production. I had lunch with Lily yesterday and she complained about how complex the BB8 is to produce. Apparently they have to do a lot of setups, special soldering, and other work on the BB8 just to keep production moving. And they have to inspect every single unit.\" \"It'll have to wait,\" said Justin. \"I'm writing a proposal to the board of directors to phase out the R2D2. We've got to increase our bottom line or we'll all be looking for jobs.\" Compute the predetermined overhead rate based on direct labour hours that the company used during the year. (There was no underapplied or overapplied overhead for the year.) Direct materials and direct labour costs per unit for the two products are as follows: R2D2 BB8 Direct Materials $75 $120 Direct Labor $36 $54 Using these data and the rate computed in (1) above, determine the unit product cost of each product under the company's traditional costing system. Assume that the company's $2,700,000 in manufacturing overhead cost can be assigned to six activity cost pools as follows: Expected Activity Activity Cost Pool Estimated Overhead Costs Total R2D2 BB8 $312,000 $1,600 1,000 600 Quality control (number of inspections) 540,000 9,000 4,000 5,000 Purchase orders (number of orders) 135,000 1,200 840 360 Soldering (number of solder joints) 675,000 200,000 Shipments (number of shipments) 198,000 600 400 200 Machine-related (machine-hours) 840,000 70,000 30,000 40,000 Machine setups (number of setups) 60,000 140,000 $2,700,000 Given these data, would you support a recommendation to expand sales of the BB8? Explain your position. From the data you prepared in (3) above, why do you suppose the BB8 \"just seems to sell itself\"? If you were president of Galaxy Incorporated, what strategy would you follow from this point forward to improve the company's overall profits? How might Galaxy Incorporated find the ABC information helpful in managing its business? Evaluation The following rubric indicates those areas you should be focusing on in preparing your assignment, and how the instructor will weigh these components relative to one another. Activity/Competencies Demonstrated 1. 2. Identification and Analysis of Issues (80%) a. Compute the predetermined overhead rate /10 b. Determine the unit product cost of each product under traditional costing /10 c. Would you support a recommendation to expand sales of the BB8 /40 d. Identifying why the BB8 \"seems to sell itself\" /20 Recommendation (20%) a. Provide a strategy for the president of Galaxy Incorporated Total % of Total Grade /20 /100