MTI makes three types of lawn tractors: M3100, M4100, and M6100. In the past, it

Question

MTI makes three types of lawn tractors: M3100, M4100, and M6100. In the past, it allocated overhead to products using machine-hours. Last year, the company produced 9,000 units of M3100, 16,000 units of M4100, and 8,000 units of M6100 and had the following revenues and costs: MTI Income Statement M3100 M4100 M6100 Total $ 9,100,000 $ 15,900,000 $ 13,900,000 $ 38,900,000 2,500,000 570,000 4,200,000 890,000 3,500,000 1,790,000 10,200,000 3,250,000 Sales revenue Direct costs Direct materials Direct labor Variable overhead Setting up machines Processing sales orders Warehousing Operating machines Shipping Contribution margin Plant administration Gross profit 2,304,000 1,936,000 2,604,000 1,250,000 858,000 $ 16,498,000 6,000,000 $ 10,498,000 MTI's controller has heard about activity-based costing and puts together an employee team to recommend cost allocation bases. The employee team recommends the following:

Explanation / Answer

Solution a:

Total variable overhead = $2,304,000 + $1,936,000 + $2,604,000 + $1,250,000 + $858,000 = $8,952,000

Total machine hours = 5700 + 9700 + 9600 = 25000

Overhead rate on the basis of machine hours = $8,952,000 / 25000 = $358.08 per hour

Solution b:

MTI Income Statement (Allocation of overhead basis machine hours) Particulars M 3100 M 4100 M 6100 Total Sales Revenue $9,100,000.00 $15,900,000.00 $13,900,000.00 $38,900,000.00 Direct Cost: Direct Material $2,500,000.00 $4,200,000.00 $3,500,000.00 $10,200,000.00 Direct Labor $570,000.00 $890,000.00 $1,790,000.00 $3,250,000.00 Variable Overhead (Machine hours * Overhead rate) $2,041,056.00 $3,473,376.00 $3,437,568.00 $8,952,000.00 Contribution Margin $3,988,944.00 $7,336,624.00 $5,172,432.00 $16,498,000.00 Plant Administration Cost $6,000,000.00 Gross Profit $10,498,000.00

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