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Thomson Company manufactured a single product called LEC 40. Then three years ago, the company automated...

Thomson Company manufactured a single product called LEC 40. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called LEC 90 that has become increasingly popular. The LEC 90 is a more complex product, requiring 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 hours of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor-hours.

Despite the growing popularity of the company’s new LEC 90, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company’s costing system. Direct material and direct labor costs per unit are as follows:

LEC 40 LEC 90
Direct materials $ 20.00 $ 46.00
Direct labor (0.20 hours and 0.60 hours @ $15.00 per hour) $ 3.00 $ 9.00

Management estimates that the company will incur $920,000 in manufacturing overhead costs during the current year and 80,000 units of the LEC 40 and 40,000 units of the LEC 90 will be produced and sold.

Solutions

Expert Solution

The total cost of LEC 40 is $ 27.60 per unit and that of LEC 90 is $ 68.80. It is not mentioned in the problem that the selling price of the two products. If the company maintained the same selling price for both product, then LEC 90 will make huge loss to the company. Working is given below:

LEC 40 LEC 90
Direct Labour Hour 0.2 0.6
LEC 40 LEC 90
Production Unit 80000 Unit 40000
DirectMaterial $ 20 1600000 46 1840000
Direct Labour @$15(80000*0.2*15) 0.2 240000 0.6 360000
Manufacturing Overhead 920000 0.2 368000 0.6 552000
Total cost 2208000 2752000
Per Unit cost(total cost/No. of units) 27.60 68.80
Manufacturing overhead allocation on the basis of Direct labour Hours
Manufacturing Overhead ($) 920000
LEC 40 (80000x.20) 16000 368000 92000*16000/40000
LEC 90(40000*.60) 24000 552000 92000*24000/40000
Total 40000 920000

ekkarill92 answered 2 years ago
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