Product profitability Sandford Inc. manufactures lawn mowers and garden tractors

Question

Product profitability Sandford Inc. manufactures lawn mowers and garden tractors. Lawn mowers are relatively simple to produce and are made in large quantities. Garden tractors are customized to individual wholesale customer specifications. The company produces and sells 300,000 lawn mowers and 30,000 garden tractors annually. Revenues and costs incurred for each product are as follows:

Manufacturing overhead totals $3,960,000, and administrative expenses equal $7,400,000.

a. Calculate the profit (loss) in total and per unit for each product if overhead is assigned to product using a per-unit basis. Round your answers to the nearest cent.

b. Calculate the profit (loss) in total and per unit for each product if overhead is assigned to products using a direct labor hour basis. Round your answers to the nearest cent.

c. Assume that manufacturing overhead can be divided into two cost pools as follows: $1,320,000, which has a cost driver of direct labor hours, and $2,640,000, which has a cost driver of machine hours (totaling 150,000). Lawn mower production uses 25,000 machine hours; garden tractor production uses 125,000 machine hours. Calculate the profit (loss) in total and per unit for each product if overhead is assigned to products using these two overhead bases. Round your answers to the nearest cent.

d. Does your answer in (a), (b), or (c) provide the best representation of the profit contributed by each product?

PLEASE SHOW YOUR CALCULATIONS/ EXPLAIN RATIONALE

Explanation / Answer

a) Lawn Mowers Garden Tractors Units produced and sold 300000 30000 Revenue 19500000 17850000 Cost of production: Direct material 4000000 2700000 Direct labor 2800000 6000000 Overhead assigned ($12 per unit) 3600000 360000 Total cost 10400000 9060000 Profit/(Loss) 9100000 8790000 Profit per unit $                30.33 $               293.00 Predetermined OH rate = Mfg OH/Total units = 3960000/330000 = $                12.00 Per unit b) Lawn Mowers Garden Tractors Units produced and sold 300000 30000 Direct labor hours used 140000 300000 Revenue 19500000 17850000 Cost of production: Direct material 4000000 2700000 Direct labor 2800000 6000000 Overhead assigned ($9 per DLH) 1260000 2700000 Total cost 8060000 11400000 Profit/(Loss) 11440000 6450000 Profit per unit $                38.13 $               215.00 Predetermined OH rate = Mfg OH/Total Direct labor hours = 3960000/440000 = $                   9.00 Per DLH c) Lawn Mowers Garden Tractors Units produced and sold 300000 30000 Direct labor hours used 140000 300000 Machine hours used 25000 125000 Revenue 19500000 17850000 Cost of production: Direct material 4000000 2700000 Direct labor 2800000 6000000 Overhead assigned: Cost pool 1, at $3 per DLH 420000 900000 Cost pool 2. at $17.60 per MH 440000 2200000 Total cost 7660000 11800000 Profit/(Loss) 11840000 6050000 Profit per unit $                39.47 $               201.67 Predetermined OH rate for Cost pool 1= Mfg OH/Total Direct labor hours = 1320000/440000 = $                   3.00 Per DLH Predetermined OH rate for Cost pool 2= Mfg OH/Total Machine hours = 2640000/150000 = $                17.60 Per MH d) Calculations at 'c' give the best representation of the profits of the products as the overheads are assigned in a more rational manner using two cost pools. The calculations at 'a' are unrepresentative being based on units of production, which will not properly reflect the quantum of resources consumed by the products. The calculations at 'b' are more rational than the calculations at 'a', but use only one cost pool--machine hours--which is a broad average.

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