Kima Company manufactures and sells two models of a home appliance. The Standard

Question

Kima Company manufactures and sells two models of a home appliance. The Standard model is a basic appliance with mostly manual features, while the Galaxy model is highly automated. The appliances are produced to order, and there are no inventories at the end of the year. The cost accounting system at Kima allocates overhead to products based on direct labor cost. Overhead in year 1, which just ended, was $3,549,500. Other data for year 1 for the two products follow: Standard ModelGalaxy Model Sales revenue Direct materials Direct labor (20,000 units) $6,140,000 2,540,000 1,740,000 (3,000 units) $2,840,000 440,000 550,000 Required a. Compute product line profits/loss for the Standard model and the Galaxy model for year 1. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) Profit/Loss Standard Galaxy b. A study of overhead shows that without the Standard model, overhead would fall to $2,320,000. Assume all other revenues and costs would remain the same for the Galaxy model in year 2. Compute product line profits/loss for the Galaxy model in year 2 assuming the Standard model was not produced or sold. (Negative amounts should be indicated by a minus sign.) Profits/Loss for Galaxy Model - Year 2

Explanation / Answer

a Overhead rate = 3549500/(1740000+550000)= 155% Standard Galaxy Sales revenue 6140000 2840000 Less: Direct materials 2540000 440000 Direct labor 1740000 550000 Overhead 2697000 852500 Profit/Loss -837000 997500 b Galaxy Sales revenue 2840000 Less: Direct materials 440000 Direct labor 550000 Overhead 2320000 Profit/Loss -470000

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