Question

Solar Salt Company has two divisions. Sales, direct materials cost, and direct labor cost data for Solar Salt's two divisions are not available. However, manufacturing overhead and gross profit data for the two divisions are available, as follows Agricultural Products Retail Products Manufacturing overhead $450,000 $250,000 Gross profit 150,000 100,000 *Manufacturing overhead is allocated to production based on the amount of direct labor cost. Solar Salt has determined that its total manufacturing overhead cost of $700,000 is a mixture of unit-level costs, batch-level costs, and product line costs. Solar Salt has assembled the following information concerning the manufacturing overhead costs, the annual number of units produced, production batches, and number of product lines in each division Total Manufacturing Overhead Costs Agricultural Products Retail Products Unit-level overhead $210,000 Batch-level overhead 280,000 Product line overhead 210,000 7,500 units 50 batches 10 lines 13,500 units 90 batches 18 lines $700,000 How much will GROSS PROFIT in each of the divisions be if Solar Salt adopts an activity-based costing system? A. Agricultural, $50,000; Retail, $200,000 B. Agricultural, loss of $50,000; Retail, $300,000 C. Agricultural, $350,000; Retail, loss of$100,000 D. Agricultural, $350,000; Retail, $100,000 E. Agricultural, $350,000; Retail, $300,000 F. Agricultural, $250,000; Retail, $450,000 G. Agricultural, loss of $50,000; Retail, loss of$100,000 H. Agricultural, $150,000; Retail, $100,000

Answer 1

Calculate the total manufacturing overhead allocated to each division under activity-based costing as follows:
	Total Manufacturing Overhead Costs	Manufacturing Overhead Allocated Under Activity-Based Costing
				Agricultural Products	Retail Products
		Unit-level overhead	210000	75000	135000
Batch-level overhead	280000	100000	180000
Product line overhead	210000	75000	135000
Total	700000	250000	450000
Calculate the difference between manufacturing overhead allocated based on direct-labor cost and activity based costing.
	Agricultural Products	Retail Products
Allocated based on direct-labor cost	450000	250000
Allocated on activity based costing	250000	450000
Difference	200000	-200000
Calculate the gross profit under activity based costing as follows:
	Agricultural Products	Retail Products
Gross profit as given	150000	100000
Difference in manufacturing overhead allocated under activity based costing	200000	-200000
Gross profit under activity based costing	350000	-100000
Therefore, the correct answer is option D.
Agricultural, $350,000; Retail, loss of $100,000