The maintenance department\'s costs are allocated to other departments based on
ID: 2777276 • Letter: T
Question
The maintenance department's costs are allocated to other departments based on the number of hours of maintenance use by each department. The maintenance department has fixed costs of $500,000 and variable costs of $30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other departments without affecting the fixed costs of the maintenance department. The maintenance department expects to provide 10,000 hours of maintenance.
The milling department is purchasing several new machines. They can purchase a service contract for $30,000 per year or turn down the service contract. If they don’t have a service contract, they will require an additional 600 hours of service from the maintenance department.
Required:
a. What is the overhead application rate for the maintenance department?
b. What is the cost to the milling department of 600 hours of maintenance?
c. How much more (less) profit will the company have if they choose the service contract over maintenance from the maintenance department?
Explanation / Answer
a. Total fixed costs = $500,000. overhead rate for fixed costs = total fixed costs/available hours of maintenance = 500,000/10,000 = $50 per hour. Variable costs = $30 per hour. Total overhead application rate = fixed overhead rate+variable overhead rate = $50+$30 = $80 per hour.
b. cost to the milling department for 600 hours of service = overhead rate*number of hours of service required = 600 hours*80 per hour = $48,000
c. We will do an incremental analysis for finding the extra profit and loss. Fixed costs will be ignored in such cases. So variable costs of 600 hours = 600*30 = $18,000
and cost of purchasing service contract = $30,000. so buying the service contract will reduce the profit by 30,000 - 18,000 = $(12,000).
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.