Total production overhead $5,017,500 Envelopes Cups Direct costs $8,250,000 $8,7

Question

Total production overhead $5,017,500
Envelopes Cups
Direct costs $8,250,000 $8,750,000
Units produced 1,500,000 350,000
Machine hours 200,000 50,000
Direct labor hours 34,500 153,625
Number of quality inspections 1,000 6,500
Revenue generated by the two products $15,000,000 $16,800,000
You have determined, using ABC, that overhead can be assigned to separate cost pools specifically:
Pool 1 = $1,260,000 using machine hours as the cost driver
Pool 2 = $2,257,500 using direct labor hours as the cost driver
Pool 3 = $1,500,000 using the number of quality inspections as the cost
driver


4. Using the new cost pools and cost drivers calculate gross profit and the rate of return of the two products.

Explanation / Answer

lets use nom of units produced as cost driver

hence overhed =(5,017,500*1,500,000)/(1,500,000 +350,000) =4067837.8

                          (5,017,500*1,500,000)/(1,500,000 +350,000)=949162.2

revenue                  15,000,000     16,800,000

Direct cost               8,250,000       8,750,000

indirectmanufacturing 4067,837.8       949,162.2

gross profit               2,682,162.2          7,100,837.8

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