"Wow! Is that R-92 model ever a loser! It's time to cut back its production and shift our resources toward the new T-95 model said Graham Thomas, executive vice president of Thomas Products Inc. Just look at this income statement I've received from accounting. The T-95 is generating over eight times as much profit as the R-92 on one sixth of the unit sales. I'm convinced that our future depends on the T-95. The year-end statement to which Thomas was referring is shown below. Model Sales Cost of goods sold Total $11,125,000 6,909, eee R-92 39,000,000 5,490,600 T-95 $2,125,000 1,410,000 Gross margin Less selling and administrative expenses 4,225,000 3,675,000 3,510,000 3,450,000 715,000 225,000 Operating income $ 550,000 $ 68,000 $ 490,000 Number of units produced and sold 30,000 5,600 "The numbers sure look that way," replied Julie Williams, the company's sales manager. "But why isn't the competition more excited about the T-95? 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 Thomas. "Now it takes only two direct labour-hours to produce a unit of the R-92 and three direct labour-hours to produce a unit of the T-95. That's considerably less than it used to take us." "I agree that automation is wonderful" replied Williams. "I suppose that's how we're able to hold down the price of the T-95. Taylor Company in England tried to bring out a 1.95 but discovered they couldn't touch our price. But Taylor is killing us on the R-92 by undercutting our price with some of our best customers. I suppose they'll pick up all of our R-92 business if we move out of that market. But who cares? We don't even have to advertise the T-95; it just seems to sell itself" "My only concern about automation is how our manufacturing overhead rate has shot up," said Thomas. Our total manufacturing overhead cost is $2.700,000. That comes out to be a hefty amount per direct labour-hour, but Dianne down in accounting has been BE "I've never understood that debit and credit stuff" replied Williams. "But I think you've got a problem in production. I had lunch with Janet, our plant manager, yesterday and she complained about how complex the T-95 is to produce. Apparently they have to do a lot of setups, special soldering, and other work on the T-95 just to keep production moving. And they have to inspect every single unit." "It'll have to wait." said Thomas. "I'm writing a proposal to the board of directors to phase out the R-92. We've got to increase our bottom line or we'll all be looking for jobs." Required: 1. 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.) Predetermined overhead rate per direct labour hour 2. Direct materials and direct labour costs per unit for the two products are as follows: Direct materials Direct labour R-92 $ 75 36 T-95 $ 120 $ 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 R-92 T-95 Unit product cost
