Question

Way Cool produces two different models of air conditioners. The company produces the mechanical systems in its components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow.

Process	Activity	Overhead Cost				Driver	Quantity
Components	Changeover		$	500,000		Number of batches	800
	Machining			279,000		Machine hours	6,000
	Setups			225,000		Number of setups	120
			$	1,004,000
Finishing	Welding		$	180,300		Welding hours	3,000
	Inspecting			210,000		Number of inspections	700
	Rework			75,000		Rework orders	300
			$	465,300
Support	Purchasing		$	135,000		Purchase orders	450
	Providing space			32,000		Number of units	5,000
	Providing utilities			65,000		Number of units	5,000
			$	232,000

   
Additional production information concerning its two product lines follows.

	Model 145			Model 212
Units produced		1,500			3,500
Welding hours		800			2,200
Batches		400			400
Number of inspections		400			300
Machine hours		1,800			4,200
Setups		60			60
Rework orders		160			140
Purchase orders		300			150

  
Required:
1. Determine departmental overhead rates and compute the overhead cost per unit for each product line. Base your overhead assignment for the components department on machine hours. Use welding hours to assign overhead costs to the finishing department. Assign costs to the support department based on number of purchase orders.
2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $250 for Model 145 and $180 for Model 212.
3. If the market price for Model 145 is $820 and the market price for Model 212 is $480, determine the profit or loss per unit for each model.

Answer 1

1)
Components department
Overhead costs	$ 1,004,000	$ 167.33 per machine hour
Machine hours	6,000
Finishing department
Overhead costs	$ 465,300	$ 155.10 per weilding hour
Weilding hours	3,000
Support department
Overhead costs	$ 232,000	$ 515.56 per purchase order
Purchase orders	450
Model 145	Activity Driver	Departmental OH Rate	Total Overhead Cost
Components	1,800	$ 167.33	$ 301,194
Finishing	800	$ 155.10	$ 124,080
Support	300	$ 515.56	$ 154,668
			$ 579,942
		Units produced	1,500
		Overhead cost per unit	$ 386.63
Model 145	Activity Driver	Departmental OH Rate	Total Overhead Cost
Components	4,200	$ 167.33	$ 702,786
Finishing	2,200	$ 155.10	$ 341,220
Support	150	$ 515.56	$ 77,334
			$ 1,121,340
		Units	3,500
		Overhead cost per unit	$ 320.38
2)
	Model 145	Model 212
Material and Labor Cost per Unit	$ 250	$ 180
Overhead Cost per Unit	$ 386.63	$ 320.38
Total Cost per unit	$ 636.63	$ 500.38
3)
	Model 145	Model 212
Sale Price / Market Price	$ 820	$ 480
Less: Total cost per unit	($ 636.63)	( $ 500.38)
Profit per unit	$ 183.37	($ 20.38)