Question

Generic Motors Corporation has two product lines, A and B. Its revenue and costs for last year is as follows: Product A Product 8 Total S00 sales volume (units) 250 Revenue Costs direct materials 750 $10,000 $50,000 $60,000 $2,000 $10,000 $12,000 $5,000 $20,000 s25,000 S19,500 $3,500 direct labor OH costs Profit Generic Motors uses ABC to allocate the overhead costs. It examined the main activities in the firm, and decided to break up the total overhead costs of $19,500 into 3 cost pools: "labor-related" - the total cost in this pool is $5,000, allocated based on direct labor dollars "sales-related" - the total cost in this pool is $4,500, allocated based on number of units *"production setups" - the total cost in this pool is $10,000, allocated based on the number of production batches. A is produced in batches of 10 units, and B is produced in batches of 5 units. Required: a) for each cost pool, compute the activity rate and the amounts allocated to product A and product B. (hint: The amounts allocated to A and B from each pool should add up to the total cost in that pool. To allocate the costs in the "production setups" pool, you will have to compute the number of batches. If the total number of batches for A and B does not add up to 125, you are doing something wrong). *"labor-related" pool: activity rate $ per DL$ Labor-related OH costs allocated to A $m Labor_related OH costs allocated to B = $ "sales-related" pool: activity rate $ | per unit Sales-related OH costs allocated to A $ Sales_related OH costs allocated to B = $ *"production setups" pool: activity rate $ per batch Production setups OH costs allocated to A $ Production setups OH costs allocated to B b) using the allocated OH costs from (a), compute the profit margin for product A and product B If you get a negative number, enter it with a minus sign, i.e., enter negative

Answer 1

Generic Motors Corporation

Answer to a) Calculation of activity rates and Allocation of Overhead costs to Product A & Product B Labor Related Overheads A B Total Labor Related Overheads 5000 Cost Driver Direct Labor Dollars Direct Labor Dollars 50001 20000 25000 Activity Rate per Labor $ 5000/25000 0.20 Allocation of Labor related OH 5000x0.2 20000x0.2 $ 1,000.00 $ 4,000.00 $ 5,000.00 Sales Related Overheads B Total 45001 Sales Related Overheads Cost Driver Number of units sold Activity Rate per Unit 250 No. of Units 500 4500/750 750 Allocation of Sales related OH 250x6 $ 500x6 $ 1,500.00 3,000.00 $ 4,500.00

Production setup Related Overheads Product setup Related Overheads Cost Driver Total 10000 No. of Product Batches Produced in batches Produced in batches of 10 units per batch of 5 units per batch 250/10 500/5 25 100 10000/125 Number of production batches 1251 Activity rate per production batch 80V Allocation of Production setup realted OHS 25x80 $ 100x80 $ 2,000.00 8,000.00 $ 10,000.00

Answer to b)

b) Computation of profit margin for Product A & Product B Product A Sales Units Product B Total 250 5001 750 Revenue (A) $ 10,000.00 $ 50,000.00 $ 60,000.00 Direct Costs: Direct Materials Direct Labor Total Direct Costs (B) 2,000.00 5,000.00 7,000.00 $ $ $ 10,000.00 20,000.00 30,000.00 $ $ $ 12,000.00 25,000.00 37,000.00 $ 1000 Overhead Costs Labor related OH Sales Related OH Product setup Related OH Total Overhead Costs (C) 1500) 40001 3000 8000 15000 50001 4500 10000 19500 2000 4500 Total Costs (D) = (B) + (C) $ 11,500.00 $ 45,000.00 $ 56,500.00 Profit (E) = (A) - (D) -1,500.00 $ 5,000.00 $ 3,500.00 Profit Margin (F) = (E)/(A) x100 (5000/50000)x100 (-1500/10000)x100 -15%

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