4. After seeing the new predetermined overhead rate, the production manager admi

Question

4. After seeing the new predetermined overhead rate, the production manager admitted that he probably wouldn’t be able to eliminate all of the 6,000 direct labor hours. He had been hoping to accomplish the reduction by not replacing worker who retire or quite, but that would not be possible. As a result, the real labor savings would be only about 2,000 hours- one worker. Given this additional information, evaluate the original information, evaluate the original decision to acquire the automated milling machine from Central Robotics.

The original information reveals the estimated predetermined overhead rate cost is $2,475,000.00 using 52,000 hours at a rate of $47.60 per hour. The new predetermined overhead rate includes the automated milling machine which will cost a total of $2,820,000.00 using 46,000 hours at a labor hours at a rate of $61.30 per hour. The machine from Central Robotics would eliminate a total of 2,000 Real labor hours which doesn’t cover the installation cost or the cost of the skilled technician that would have to be hired with a yearly income of $45,000.

Explanation / Answer

The original estimated predetermined overhead rate for a cost of $2,475,000.00 and estimated hours used 52,000 was $47.60 per hour, whereas the new predetermined overhead rate comes out to $61.30 per hour without the installation cost or technician expense.

So, the decision to acquire the automated milling machine from Central Robotics is not correct as it does not reduced the real labor hours, but increase the overhead cost almost around 33% of the original predetermined overhead rate. The automated milling machine was acquired so that direct labor hours reduced, but the same was not possible as only 2000 real labor hours were eliminated through its use.

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