TeleTech Corporation manufactures two different color printers for the business market. Cost estimates for the two models for the current year are as follows:
_______________________________________________Basic System Advanced System
Direct material............................................................................$400..................$800
Direct labor (20 hours at $15 per hour)........................................300....................300
Manufacturing overhead*............................................................400....................400
Total........................................................................................$1,100................$1,500
Each model of printer requires 20 hours of direct labor. The basic system requires 5 hours in department A and 15 hours in department B. The advanced system requires 15 hours in department A and 5 hours in department B. The overhead costs budgeted in these two production departments are as follows:
___________________________________Department A Department B
Variable cost................................................. $16 per direct-labor hour...$4 per direct-labor hour
Fixed cost................................................................ $200,000...............................$200,000
The firm's management expects to operate at a level of 20,000 direct-labor hours in each production department during the current year. (This estimate is based on the practical capacity of each department.)
Required:
1. Show how the company's predetermined overhead rate was determined.
2. If the firm prices each model of color printer at 10 percent over its cost, what will be the price of each model?
3. Suppose the company were to use departmental predetermined overhead rates. Calculate the rate for each of the two production departments.
4. Compute the product cost of each model using the departmental overhead rates calculated in requirement (3).
5. Compute the price to be charged for each model, assuming the company continues to price each product at 10 percent above cost. Use the revised product costs calculated in requirement (4).
6. Write a memo to the president of TeleTech Corporation making a recommendation as to whether the firm should use a plant wide overhead rate or departmental rates. Consider the potential implications of the overhead rates and the firm's pricing policy. How might these considerations affect the firm's ability to compete in the marketplace?