Question

Howard Company produces a variety of electronic equipment. One of its plants produces two dot matrix printers, the superior and the regular. At the beginning of the year 2013, the following data were prepared for this plant:

                                                                        Superior                       Regular

                        Quantity                                   50,000                         400,000

                        Selling price                            $475.00                           $300.00

                        Unit prime cost*                      $180.00                           $110.00

                        Unit overhead cost                     $20.00                          $130.00

                        Prime cost equals direct materials and direct labor.

                                The unit overhead cost is calculated using the predetermined overhead application  

                        rate based on direct labor-hours.

Upon examining the data, the manager of marketing was particularly impressed with the per-unit profitability of the superior printer and suggested that more emphasis be placed on producing and selling this product. The plant supervisor objected to this strategy, arguing that the cost of the superior printer was understated. He argued that overhead costs could be assigned more accurately by using multiple cost drivers that reflected each product’s consumption. To convince top management that multiple rates could produce a significant difference in product costs, he obtained the following projected information from the controller for the preceding production output:

                                                                                                  Activity Consumption

Overhead Activity        Cost Driver                  Pool Rate*       Superior           Regular

Setups                          Number of setups         $2,800             200                    100

Machine costs              Machine-hours             $81.12          100,000             400,000

Engineering                  Engineering-hours            $40             45,000             120,000

Packing                        Packing orders                  $20             50,000             200,000

*Cost per unit of cost driver

Required:

Using the projected data based on traditional costing, calculate gross profit per unit, and total gross profit for each product.

Using the pool rates, calculate the overhead cost per unit for each product. Using this new unit cost, calculate gross profit per unit, and total gross profit for each product.

In view of the outcome in requirement 2, evaluate the suggestion of the manager of marketing to switch the emphasis to the superior model.

Answer 1

So From the Above calculations its Clear that Superior products overhead was understated. and it is advisable to produce more produce the regular product.

Notes.

Gross profit = Revenue – Prime cost- Overhead cost.

Total Overhead = Activity Consumption* Pool Rate .

Overhead cost per unit = Total overhead cost /Number of units produced.