Question

Utease Corporation has many production plants across the midwestern United States. A newly opened plant, the Bellingham plant, produces and sells one product. The plant is treated, for responsibility accounting purposes, as a profit center. The unit standard costs for a production unit, with overhead applied based on direct labor hours, are as follows.

Manufacturing costs (per unit based on expected activity of 23,000 units or 57,500 direct labor hours):

Direct materials (3.0 pounds at $20)	$	60.00
Direct labor (2.5 hours at $90)		225.00
Variable overhead (2.5 hours at $30)		75.00
Fixed overhead (2.5 hours at $40)		100.00
Standard cost per unit	$	460.00
Budgeted selling and administrative costs:
Variable	$	10		per unit
Fixed	$	1,400,000

Expected sales activity: 19,000 units at $550 per unit

Desired ending inventories: 14% of sales

Assume this is the first year of operations for the Bellingham plant. During the year, the company had the following activity.

Units produced		22,000
Units sold		20,500
Unit selling price	$	545
Direct labor hours worked		54,500
Direct labor costs	$	4,959,500
Direct materials purchased		70,000		pounds
Direct materials costs	$	1,400,000
Direct materials used		70,000		pounds
Actual fixed overhead	$	1,200,000
Actual variable overhead	$	1,625,000
Actual selling and administrative costs	$	2,590,000

  

In addition, all over- or underapplied overhead and all product cost variances are adjusted to cost of goods sold.

Required:

i. Assume that under the investment center evaluation plan the plant manager will be awarded a bonus based on ROI. If the manager has the opportunity in the coming year to invest in new equipment for $600,000 that will generate incremental earnings of $75,000 per year, would the manager undertake the project?

Answer 1

actual units produced: 22000
actual direct labour hours: 54500
actual units sold: 20500
	standard (in $)	actual (in $)
direct material cost
60*22000	1320000
		1400000
direct labour cost
225*22000	4950000
		4959500
Variable Overheads
75*22000	1650000
		1625000	25000	under absorption
Fixed Overheads
100*23000	2300000
		1200000	1100000	under absorption
Cost of Goods Manufactured	10220000	9184500
Closing Stock
10220000/22000*1500	696818	626216
Cost of Goods Sold	9523182	8558284
Add Selling Expenses
Variable Selling & Adm. Overheads
10*19000	190000
Fixed Selling & Adm. Overheads	1400000
		2590000	-1190000	over absorption
Total Cost of Sales	11113182	11148284	-65000	net over absorption
less Over absorption of overheads		65000
Cost of sales	11113182	11083284