Question

Consider the following data for two products of Gitano Manufacturing. (Loss amounts should be indicated with a minus sign. Round your intermediate calculations and "OH rate and cost per unit" answers to 2 decimal places) Product A Number of units produced 11,500 units Direct labor cost (@ $30 per DLH) 0.21 DLH per unit Direct materials cost $ 2.20 per unit Product B 1,300 units 0.25 DLH per unit $ 2.30 per unit Activity Machine setup Materials handling Quality control inspections Overhead costs $121,080 57,000 74,000 $252,080

4.2 Should this information influence company strategy?

• Yes

• No

Answer 1

1) Plantwide overhead rate = Estimated overhead costs / Total estimated DLHs
252080 / (11500*0.21 + 1300*0.25)
252080 / 2740 = $92 per DLH
Overhead Assigned:	Activity Driver	Plantwide OH rate	Total OH Cost	Units produced	OH cost per unit
Product A	2415	92	222180	11500	19.32
Product B	325	92	29900	1300	23
Production cost per unit:
	Product A	Product B
DM cost	2.2	2.3
DL cost	0.21*30=6.3	0.25*30=7.50
OH cost	19.32	23
Total Cost per unit	27.82	32.8
2) Profit or loss per unit:
	Product A	Product B
Market Price	34.06	60
Less:Cost per unit	27.82	32.8
Profit per unit	6.24	27.2
3) Overhead rate with ABC method of allocation:
	machine setup	Mat. Handling	Quality control
Estimated overhead cost	121000	57000	74000
Estimated Activity driver	29	22	296
Overhead rate per driver	4172.413793	2590.909091	250
Overhead Assigned:	Activity Driver	Activity Rate	Total OH cost
Product A
machine setup	9	4172.413793	37551.72414
Mat. Handling	18	2590.909091	46636.36364
Quality control	56	250	14000
total OH assigned			98188.08777
Units produced			11500
OH cost per unit			8.54
Product B
machine setup	20	4172.413793	83448.27586
Mat. Handling	4	2590.909091	10363.63636
Quality control	240	250	60000
total OH assigned			153811.9122
Units produced			1300
OH cost per unit			118.32
Total Manufacturing costs:	Product A	Product B
DM cost	2.2	2.3
DL cost	0.21*30=6.3	0.25*30=7.50
OH cost	8.54	118.32
Total Cost per unit	17.04	128.12
4) Profit or loss per unit:
	Product A	Product B
Market Price	34.06	60
Less:Cost per unit	17.04	128.12
Profit/Loss per unit	17.02	-68.12
4.2) Yes, the information do influence the company strategy
as through ABC method the product B is making loss, so it
should stop of production of Product B.