Compute the predetermined overhead rate.

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December 22, 2020
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December 22, 2020

You are a Consultant for the professional service firm, BUSI2083 LLP. Your firm specializes in providing a wide variety ofinternal business solutions for different clients. It is your firstday on the job and a Manager asks you for some help with a clientin the aerospace sector. Eager to please on your first day, youhead over to Galaxy Incorporated and sit down with the ExecutiveVice President to obtain more information. “That R2D2 model is such a stinker! I think it’s time to cutback its production and shift our resources toward the new BB8model,” said Justin Medakiewicz, Executive VP of GalaxyIncorporated. “Take a look at this Income Statement I’ve receivedfrom accounting. The BB8 is generating over eight times as muchprofit as the R2D2 on one-sixth of the unit sales. I’m convincedthat we should focus on the BB8 going forward.” The year-endstatement which Justin was referring to is shown below. “The numbers sure look that way,” replied Melissa Montoro, thecompany’s sales manager. “But why isn’t the competition interestedin replicating the BB8? I know we’ve been producing the model foronly three years, but I’m surprised that more of our competitorshaven’t recognized what a cash cow it is.” “I think it’s our new automated plant,” replied Justin. “Now ittakes only two direct labour hours to produce a unit of the R2D2and three direct labour hours to produce a unit of the BB8. That’sconsiderably less than it used to take us.” “I agree that automation is very beneficial,” replied Melissa.“I suppose that’s how we’re able to hold down the price of the BB8.Trekkie Corporation in the UK tried to bring out a BB8 butdiscovered they couldn’t come close to matching our price. ButTrekkie is killing us on the R2D2 by undercutting our price withsome of our best customers. I suppose they’ll pick up all of ourR2D2 business if we move out of that market. But who cares? Wedon’t even have to advertise the BB8; it just seems to sellitself.” “My only concern about automation is how our manufacturingoverhead rate has shot up,” said Justin. “Our total manufacturingoverhead cost is $2,700,000. That comes out to be a hefty amountper direct labour hour, but Timothy down in accounting has beenusing direct labour hours as the base for computing overhead ratesfor years and doesn’t want to change. I don’t suppose it matters aslong as costs get assigned to products.” “I’ve never understood that debit and credit stuff,” repliedMelissa. “But I think you’ve got a problem in production. I hadlunch with Lily yesterday and she complained about how complex theBB8 is to produce. Apparently they have to do a lot of setups,special soldering, and other work on the BB8 just to keepproduction moving. And they have to inspect every single unit.” “It’ll have to wait,” said Justin. “I’m writing a proposal tothe board of directors to phase out the R2D2. We’ve got to increaseour bottom line or we’ll all be looking for jobs.” a. Compute the predetermined overhead rate based on directlabour hours that the company used during the year. (There was nounderapplied or overapplied overhead for the year.) Direct materials and direct labour costs per unit for the twoproducts are as follows: b. Using these data and the rate computed in (1) above,determine the unit product cost of each product under the company’straditional costing system. Assume that the company’s $2,700,000 in manufacturing overheadcost can be assigned to six activity cost pools as follows: c. Given these data, would you support a recommendation toexpand sales of the BB8? Explain your position. d. From the data you prepared in (3) above, why do you supposethe BB8 “just seems to sell itself”? e. If you were president of Galaxy Incorporated, what strategywould you follow from this point forward to improve the company’soverall profits? f. How might Galaxy Incorporated find the ABC informationhelpful in managing its business? .