Question

In: Accounting

Kima Company manufactures and sells two models of a home appliance. The Standard model is a...

Kima Company manufactures and sells two models of a home appliance. The Standard model is a basic appliance with mostly manual features, while the Galaxy model is highly automated. The appliances are produced to order, and there are no inventories at the end of the year.

The cost accounting system at Kima allocates overhead to products based on direct labor cost. Overhead in year 1, which just ended, was $3,342,250. Other data for year 1 for the two products follow:

Standard Model Galaxy Model
(20,000 units) (3,000 units)
Sales revenue $ 6,150,000 $ 2,850,000
Direct materials 2,550,000 450,000
Direct labor 1,750,000 555,000

Required:

a. Compute product line profits/loss for the Standard model and the Galaxy model for year 1. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

Profit/Loss
Standard
Galaxy

b. A study of overhead shows that without the Standard model, overhead would fall to $2,325,000. Assume all other revenues and costs would remain the same for the Galaxy model in year 2. Compute product line profits/loss for the Galaxy model in year 2 assuming the Standard model was not produced or sold. (Negative amounts should be indicated by a minus sign.)

Profits/Loss for Galaxy Model - Year 2

Solutions

Expert Solution

Overhead rate 145% =3342250/(1750000+555000)
1a
Standard Galaxy
Sales revenue 6150000 2850000
Less: Costs
Direct materials 2550000 450000
Direct labor 1750000 555000
Overhead:
1750000 x 145% 2537500
555000 x 145% 804750
Total costs 6837500 1809750
Profit/Loss -687500 1040250
b
Sales revenue 2850000
Less: Costs
Direct materials 450000
Direct labor 555000
Overhead 2325000
Total costs 3330000
Profits/Loss for Galaxy Model - Year 2 -480000

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