National Battery Company produces a wide variety of batteries for home, automobi

Question

National Battery Company produces a wide variety of batteries for home, automobile, and marine use. One example of its many products is the Road Guardian automobile battery. The standard cost for this battery is as follows: Standard Cost, Road Guardian Material Labor Overhead 4 Total $20 At the start of the current year, 2015, the company estimated that it would incur 42,800,000 of overhead costs and $5,350,000 of direct labor costs. Thus, $8 of overhead is applied at standard for each dollar of direct labor. Overhead is essentially completely fixed, which reflects the high level of investment in automated manufacturing. During 2015, the company experienced a labor strike that severely limited production, and standard labor cost was only $4,719,000. At a recent meeting in early January 2016, C.W. Rogers, the president of National, asked the company controller, Walter Cox, to estimate the effect of the strike on company profit. The following morning, Walter sent the president a memo: Date: January 7, 2016 To: C.W. From: Walter Subject: Effect of strike on company profit As you know, profit in 2015 was greatly affected by a strike, which reduced productive capacity. The way to measure the impact of the reduced capacity is to examine the overhead volume variance. At the start of the year, we budgeted overhead to be 42,800,000. Actual overhead was $23,012,000 so we had a favorable overhead budget variance of $19,788,000. However, we applied only $37,752,000 of overhead to inventory ($8 overhead rate × 4,719,000 standard labor). Thus, we had an unfavorable overhead volume variance of $5,048,000.

Explanation / Answer

Profit on sale of one unit = Selling price - Cost

                                     = 48 - 20 = 28

Loss on 684000 units = 684000 * 28 = 19,152,000

effect on profit = $ 19,152,000

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