The following data pertain to the budgeted overhead for Waymire, Inc., which makes wires and coils.

Waymire, Inc., has asked for your help in estimating capacity costs if it implements an ambitious plan to rationalize its product portfolio. The change would also increase the amount of automation in the plant. If implemented, the change would dramatically alter Waymire's activity profile. Waymire provides you with the following additional information concerning activity levels before and after the change in product portfolio.

Required:
a. Waymire currently uses labor hours to allocate all capacity costs (including SGA costs) to products. Using the allocation rate per labor hour, estimate the capacity cost after the change in operations.
b. Group costs into manufacturing and marketing costs. Repeat part (a) with machine hours as the allocation basis for manufacturing costs and revenue as the allocation basis for marketing costs.
c. Could you construct a better estimate using a combination of these four drivers to model the change in activity levels? Notice that you will have to form four cost pools to perform such an allocation.
d. How does the refinement in part (c) bring the analysis closer to direct estimation of capacity costs? Comment on the relative merits and demerits of direct estimation and using allocations to estimate capacity costs.

Transcribed Image Text:

ltem Amoun $2,400,000 460,000 640,000 1,600,000 3,450,000 1,410,000 840,000 1,200,000 1,500,000 S13,500,000 Materials handling and inventory Supervision Payroll Factory administration Machine depreciation Machine operations sales offices Travel and other customer development Seling administration Total capacity costs Current AmountExpected Amount prior to change) $48,000,000 Cafter the change tew Materials cost Labor hours Machine hours Revenue S52,000,000 121,500 32,300 $175,000,000 135,000 hours 81,000 hours $162,000,000