Tio Juano, ltd. makea a variety of metal wall hangings that are sold mainly to tourists. At the beginning of January 2021, the firm estimated the following for the year:

Unit sales 23,000 Average unit selling price $245

DM $1,799,750 DL 888,950 OH 2,567,400 DL hours 45,000 Machine hours 170,000

On December 2021, the following actual amounts were reported:

Unit sales 28,300 Average unit selling price $265

DM $2,209,500 DL 987,400 OH 2,693,400 DL hours 56,800 Machine hours 175,000

The most popular products is the Kokopeli silhouette dancing in the desert. It sells for $195 per unit. The second most popular product is a stand of Pacific cypress trees growing by the ocean. It sells for $320 per unit. The expected costs and resources consumed for one unit of each of the two products are as follows

Kokopeli Cypress trees DM $18.50 $105.70 DL 25.60 69.30 DLH 1.3 2.5 MH 6.8 3.7

1. Assuming that OH is applied on the basis of DL$, compute the cost of one unit of each of the two products as well as the gross margin per unit.

2. Assuming that OH is applied on the basis of machine hours, compute the cost of one unit of each of the two products as well as the gross margin per unit.

3. Compute OH over or under applied for the year of 2021. Do this for both potential OH application bases.

1. OH applied on the basis of direct labour dollars					2. OH applied on the basis of MH
Computation of OH rate					Computation of OH rate
Total estimated OH	2,567,400				Total estimated OH	2,567,400
Total estimated DL$	888,950				Total estimated MH	170,000
Rate	2.89	per DL$			Rate	15.10	per MH
Unit Costs					Unit Costs
	Kokopeli	Cypress trees				Kokopeli	Cypress trees
DM	$18.50	$105.70			DM	$18.50	$105.70
DL	25.60	69.30			DL	25.60	69.30
OH	73.94	200.15			OH	102.70	55.88		OH = rate times DL$/MH per unit
Cost	$118.04	$375.15			Cost	$146.80	$230.88
Gross Margin					Gross Margin
SP	195.00	320.00			SP	195.00	320.00
Unit cost	118.04	375.15			Unit cost	146.80	230.88
Gross Margin	$ 76.96	$ (55.15)			Gross Margin	$ 48.20	$ 89.12
3. OH over or under applied
Total actual OH	2,693,400				Total actual OH	2,693,400
Total applied OH	2,851,736				Total appied OH	2,642,912		OH Applied = Total actual units in base times rate
OH over applied	158,336				OH under applied	50,488

ONLY THIS QUESTION!!! Explain why the cypress trees wall hanging appears to be profitable when the OH application base is machine hours but not when it is direct labour dollars. Keep in mind that the same thing (or the opposite thing) does not happen to the Kokopeli wall hanging.