Manteca, Inc., produces two types of speakers: Deluxe and regular. Manteca uses

Question

Manteca, Inc., produces two types of speakers: Deluxe and regular. Manteca uses a plantwide rate based on direct labor hours to assign its overhead costs. The company has the following estimated and actual data for the coming year:

Estimated overhead $750,000

Expected Activity 25,000

Actual Activity (direct labor hours):

Deluxe speaker 5,000

Regular speaker 20,000

Units produced:

Deluxe speaker 10,000

Regular speaker 100,000

1. Calculate the predetermined plantwide overhead rate and the applied overhead for each product, using labor hours.

2. Calculate the overhead cost per unit for each product.

3. What if the deluxe product used 10,000 hours (to produce 10,000 units) instead of 5,000 hours (total expected hours remian the same)? Calculate the effect on the profitability of this product line if all 10,000 units are sold, and then discuss the implications of this outcome.

Explanation / Answer

Hi,

Please find the answer as follows:

Part 1:

Predetermined plantwide overhead rate = Estimated Overhead/Expected Activity (Hours) = 750000/25000 = 30 Per Hour

Overhead Applied to Deluxe Speaker = 5000*30 = 150000

Overhead Applied to Regular Speaker = 20000*30 = 600000

Part B:

Overhead Cost Per Unit fpr Deluxe Speaker = 150000/10000 = 15 per unit

Overhead Cost Per Unit fpr Deluxe Speaker= 600000/100000 = 6 per unit

Part C:

There would be an increase in the amount of overhead of 150000 (5000*30) taking the total overhead to 300000 in place of earlier 150000. This would result in a decline in the overall profitability of Deluxe Product.

Thanks.

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