Question

Executive Images Corporation produces two types of wooden bookends: plain and hand-carved. The following information about the production process is available:

	Plain	Hand-Carved
Number produced	120,000	75,000
Machine hours	95,000	25,000
Inspection hours	7,000	35,000
Revenues	$4,800,000	$4,400,000
Direct costs	$3,800,000	$3,100,000

Total factory overhead is $1,200,000. Of this overhead, $500,000 is related to utilities (cost driver = machine hours) and the remainder is related to quality control (cost driver = inspection hours).

A) If the Corporation uses ABC allocation method, what is the profit per unit of “Plain” bookend? Per unit of “Hand-Carved” bookend?

B) If the Corporation uses traditional method and allocates the factory overhead using machine hours, what is the profit per unit for each product?

Please show work and all equations used.

Answer 1

Computation of Activity Rate
ACTIVITY	OVERHEAD COST	/	ACTIVITY	=	ACTIVITY RATE
Utilities	$500,000.00	/	120000	=	$4.17	Per Machine hour
			(95000+25000)
Qualty Control	$700,000.00	/	42000	=	$16.67	Per Inspection Hour
			(35000+7000)

Computation of Profit - As per ABC-Executive Images Corporation
	Plan	Hand Carved
Revenue (a)	$4,800,000.00	$4,400,000.00
Total Cost
Direct Cost	$3,800,000.00	$3,100,000.00
Overhead Cost	$7,622.00	$33,578.00
Utilities	$396,150.00	$104,250.00
	(95000*4.17)	(25000*4.17)
Quality Control	$116,690.00	$583,450.00
	(7000*16.67)	(35000*16.67)
Total Cost (b)	$4,320,462.00	$3,821,278.00
Profit (c=a-b)	$479,538.00	$578,722.00
No. of Unit (d)	120000	75000
Profit per Unit (c/d)	$4.00	$7.72

Predetermined Overhead Rate = Estimated Overhead/ Machine Hour

(1200000/120000)=$10 per machine Hour

Computation of Profit - As per Tradition-Executive Images Corporation
	Plan	Hand Carved
Revenue (a)	$4,800,000.00	$4,400,000.00
Total Cost
Direct Cost	$3,800,000.00	$3,100,000.00
Overhead Cost	$950,000.00	$250,000.00
	(95000*10)	(25000*10)
Total Cost (b)	$4,750,000.00	$3,350,000.00
Profit (c=a-b)	$50,000.00	$1,050,000.00
No. of Unit (d)	120000	75000
Profit per Unit (c/d)	$0.42	$14.00