Question

Isaac Engines Inc. produces three products—pistons, valves, and cams—for the heavy equipment industry. Isaac Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows:

	Budgeted Volume (Units)		Direct Labor Hours Per Unit		Price Per Unit		Direct Materials Per Unit
Pistons	6,000		0.30		$40		$ 9
Valves	13,000		0.50		21		5
Cams	1,000		0.10		55		20

The estimated direct labor rate is $20 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Isaac Engines is $235,200.

If required, round all per unit answers to the nearest cent.

a. Determine the plantwide factory overhead rate.
$ per dlh

b. Determine the factory overhead and direct labor cost per unit for each product.

	Direct Labor Hours Per Unit	Factory Overhead Cost Per Unit	Direct Labor Cost Per Unit
Pistons	dlh	$	$
Valves	dlh	$	$
Cams	dlh	$	$

c. Use the information provided to construct a budgeted gross profit report by product line for the year ended December 31, 20Y2. Include the gross profit as a percent of sales in the last line of your report, rounded to one decimal place.

Isaac Engines Inc.
Product Line Budgeted Gross Profit Reports
For the Year Ended December 31, 20Y2
	Pistons	Valves	Cams
	$	$	$
Product Costs
	$	$	$
Total Product Costs	$	$	$
Gross profit (loss)	$	$	$
Gross profit percentage of sales	%	%	%

d. What does the report in (c) indicate to you?

Valves have the   gross profit as a percent of sales. Valves may require a   price or   cost to manufacture in order to achieve a higher profitability similar to the other two products.

Answer 1

a. Plantwide factory overhead rate = Budgeted factory overhead/Total budgeted direct labor hours

	Budgeted Volume	DLH per unit	Total DLH
Pistons	6000	0.30	1800
Valves	13000	0.50	6500
Cams	1000	0.10	100
Total budgeted DLH			8400

Plantwide factory overhead rate = $235200/8400 = $28 per DLH

b.

	Direct Labor Hours Per Unit	Factory Overhead Cost Per Unit	Direct Labor Cost Per Unit
Pistons	0.30	8.40	6.00
Valves	0.50	14.00	10.00
Cams	0.10	2.80	2.00

Working:

	Direct Labor Hours Per Unit	Factory Overhead Cost Per Unit	Direct Labor Cost Per Unit
Pistons	0.3	=28*0.3	=20*0.3
Valves	0.5	=28*0.5	=20*0.5
Cams	0.1	=28*0.1	=20*0.1

c.

Isaac Engines Inc.
Product Line Budgeted Gross Profit Reports
For the Year Ended December 31, 20Y2
	Pistons	Valves	Cams
Sales	240000	273000	55000
Product Costs
Direct materials	54000	65000	20000
Direct labor	36000	130000	2000
Factory overhead	50400	182000	2800
Total Product Costs	140400	377000	24800
Gross profit (loss)	99600	-104000	30200
Gross profit percentage of sales	41.5%	-38.1%	54.9%

Working:

	Pistons	Valves	Cams
Sales	=6000*40	=13000*21	=1000*55
Product Costs
Direct materials	=6000*9	=13000*5	=1000*20
Direct labor	=6000*6	=13000*10	=1000*2
Factory overhead	=6000*8.4	=13000*14	=1000*2.8

d. Valves have the lowest gross profit as a percent of sales. Valves may require a higher price or lower cost to manufacture in order to achieve a higher profitability similar to the other two products.