Question

Exercise 4-8 Using departmental overhead rates to assess prices LO P2

Way Cool produces two different models of air conditioners. The company produces the mechanical systems in their 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		$	458,000		Number of batches	870
	Machining			313,000		Machine hours	8,320
	Setups			232,000		Number of setups	200
			$	1,003,000
Finishing	Welding		$	188,000		Welding hours	5,900
	Inspecting			233,000		Number of inspections	875
	Rework			61,500		Rework orders	160
			$	482,500
Support	Purchasing		$	135,000		Purchase orders	525
	Providing space			33,000		Number of units	4,820
	Providing utilities			67,000		Number of units	4,820
			$	235,000

   
Additional production information concerning its two product lines follows.

	Model 145			Model 212
Units produced		1,800			3,020
Welding hours		2,400			3,500
Batches		435			435
Number of inspections		505			370
Machine hours		3,050			5,270
Setups		100			100
Rework orders		110			50
Purchase orders		350			175

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 $270 for Model 145 and $210 for Model 212.
3. If the market price for Model 145 is $1,475 and the market price for Model 212 is $320, determine the profit or loss per unit for each model.

Answer 1