Kallapur Company manufactures two products: KAP1, which sells for $120; and QUIN

Question

Kallapur Company manufactures two products: KAP1, which sells for $120; and QUIN, which sells for $220. Estimated cost and production data for the current year are as follows: KAP1 QUIN Direct materials cost $30 $45 Direct labor cost (@ $12/hr) $24 $60 Estimated production (units) 25,000 15,000 In addition, fixed manufacturing overhead is estimated to be $2,000,000 and variable overhead is estimated to equal $3 per direct labor hour. Kallapur desires a 15 percent return on sales for all of its products. Instructions a. Calculate the target cost for both KAP1 and QUIN. b-1. Estimate the total manufacturing cost per unit of each product if fixed overhead costs are assigned to products on the basis of estimated production in units. b-2. Which of the products is earning the desired return? KAP1 QUIN c-1. Recalculate the total manufacturing cost per unit if fixed overhead costs are assigned to products on the basis of direct labor hours. c-2. Which of the products is earning the desired return? KAP1 QUIN d. On the basis of the confusing results of parts b and c, Kallapur's manager decides to perform an activity analysis of fixed overhead. The results of the analysis are as follows: Demands Activity Costs Driver KAP1 QUIN Machine set-ups $ 400,000 # of set-ups 100 400 Purchase orders 600,000 # of orders 200 100 Machining 500,000 # of machine-hours 2,000 6,000 Inspection 200,000 # of batches 50 30 Shipping to customers 300,000 # of shipments 300 200 Total fixed overhead $ 2,000,000 d-1. Estimate the total manufacturing cost per unit of each product if activity-based costing is used for assigning fixed overhead costs. (Round your intermediate calculations and final answers to 2 decimal places.) d-2. Under this method, which product is earning the desired return? KAP1 QUIN f-1. Kallapur's production manager believes that design changes would reduce the number of set-ups required for QUIN to 25. Fixed overhead costs for set-ups would remain unchanged. What will be the impact of the design changes on the manufacturing costs of both products? (Round your intermediate calculations and final answers to 2 decimal places.) f-2. Which of the products will earn the desired return? KAP1 QUIN g-1. An alternative to the design change is to purchase a new machine that will reduce the number of set-ups for KAP1 to 20 and the number of set-ups for QUIN to 80. The machine will also reduce fixed set-up costs to $200,000. Calculate the manufacturing costs for each product if the machine is purchased. (Round your intermediate calculations and final answers to 2 decimal places.) g-2. Should Kallapur purchase the new machine? Yes No

Explanation / Answer

Ans-

a)

b-1)

b-2)

QUIN is earning desire return.

c-1)

c-2)

KAP 1 is earning desire return.

KAP 1($) QUIN($) Sale /Unit 120 220 Less-Variable cost Direct Material cost 30 45 Direct Labor cost 24 60 Variable Overhead 6 25 (24/12*3) (60/12*5) Target Cost of product 60 130

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