Question

Padmanabhan, Inc. manufactures two products in its production facility.  Estimated production details for each product for the coming year are as follows:

Product X1	Product GB 12
X1 - Estimated production – 1,200 units	GB 12- Estimated production – 800 units
X1 - Unit raw materials cost -$300.00 per unit	GB 12 -Unit raw materials cost -$200.00 per unit
X1 - Unit direct labor - 4 hours per unit at $12 per hour	GB 12 -Unit direct labor - 4 hours per unit at $12 per hour
X1- 1 machine hour for each unit of X1	GB -12  - 4 machine hours for each unit of GB 12

Estimated total overhead is $308,000 per year.  Overhead costs are machinery depreciation and the costs of the maintenance department that is primarily engaged in calibrating, adjusting, repairing, and maintaining the highly automated production machinery.

Product X1 and Product GB12 are about the same size and weight and require the same amount of direct labor so Padmanabhan currently allocates overhead on a per unit of production basis.  That is, the estimated overhead costs are divided by the total number of products produced to get the overhead allocated to each one.  Currently, product GB12 has a lower reported unit cost than product X1, is priced less, and is marketed as an “economy” product.  Competitors seem to be unable to match the selling price of Product GB12, but Product X1 is competing with several comparable products that are priced lower.  Padmanabhan is therefore planning to expand its marketing and production efforts for Product GB12.

Calculate the total unit cost of each product as Padmanabhan is currently doing it.  For example, the current cost for raw materials per unit is $300 for Product X1. (Type inside the table cells)

	Product X1 Costs (each)	Product GB12 costs (each)
Raw Material	$300
Direct Labor
Overhead
Total Unit Cost

a. Show how you computed unit overhead costs under the current process.

<Type your response Here>

b. Comment on Padmanabhan’s current process for allocating overhead.  

<Type your response Here>

c. Based on the description of the manufacturing process, would you recommend any changes to the way Padmanabhan currently allocates overhead? Why? If so, recompute unit cost and be sure to show the computations and allocation process you would recommend for manufacturing overhead.    

<Type your response Here>

	Product X1 Costs (each)	Product GB12 costs (each)
Raw Material	$300
Direct Labor
Overhead
Total Unit Cost

d. Show how you are computing overhead below.

<Type your response Here>

e. Does your computation and analysis explain the competitive pressures Padmanabhan has been facing?  How?

Answer 1

Calculation of total unit cost as per current process

particulars	product x1(per unit cost)	product GB12 (per unit cost)
Raw material	$300	$200
Direct labour	$48	$48
Overhead	$154	$154
Total unit costs	$502	$402

a. overhead per unit cost = Total overhead / (unit of X1 + unit of GB12)
= $308000/(1200unit + 800unit)
=$154

b. since the overhead cost are mostly pertaining to the use and maintance of machince and allocation of overhead cost should be on the basis of machine hour rather than current per unit model therefore current process of allocating overhead cost is completly wrong more over it resulted mis pricing of the product in the market due to this current process of allocation of overhead.

c. On the basis of discription of manufacturing process it is advised that the overhead should be allocated on the basis of machine hour this will reflect better way of per unit cost computation therefore final price of the product will be better

Re-computation of per unit cost

particulars	product x1(per unit cost)	product GB12 (per unit cost)
Raw material	$300	$200
Direct labour	$48	$48
Overhead	$70	$280
Total unit cost	$418	$528

d. computation of overhead on the basis of machine hour

Overhead per machine hour = $308000 / (1200unit x 1hour for each unit + 800unit x 4hour for each unit)
=$308000 / 4400hours
= $70 per hour

e. It is correct the computation shows the competitve pressure on padmanabhan has been bear due to the mis pricing of the product. padmanabhan previously computed wrong cost of GB12 as $402 instead of $528 per unit. it is priced lower than the competition and the competition unable to match the price of GB12 other product of x1 it also computed wrong cost as $502 instead of $418 per unit which made product x1 at the higher price resulting in x1 competiting with several priced products in the market