Question

Kima Company manufactures and sells two models of a home appliance. The Standard model is a basic appliance with mostly manual features, while the Galaxy model is highly automated. The appliances are produced to order, and there are no inventories at the end of the year.

The cost accounting system at Kima allocates overhead to products based on direct labor cost. Overhead in year 1, which just ended, was $3,642,500. Other data for year 1 for the two products follow:

	Standard Model			Galaxy Model
	(20,000 units)			(3,000 units)
Sales revenue	$	6,180,000		$	2,880,000
Direct materials		2,580,000			480,000
Direct labor		1,780,000			570,000

Required:

a. Compute product line profits/loss for the Standard model and the Galaxy model for year 1. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

b. A study of overhead shows that without the Standard model, overhead would fall to $2,340,000. Assume all other revenues and costs would remain the same for the Galaxy model in year 2. Compute product line profits/loss for the Galaxy model in year 2 assuming the Standard model was not produced or sold. (Negative amounts should be indicated by a minus sign.)

Answer 1

Calculation of profit/loss

	Standard	Galaxy
Sales Revenue	6,180,000	2,880,000
Direct material	2,580,000	480,000
Direct labor	1,780,000	570,000
Overheads	2,759,000	883,500
Profit/Loss	-939,000	946,500

Overhead cost for standard model = 3642,500*1780,000(1780,000+570,000)

B. Profit = 2,880,000 -480,000 -570,000 - 2,340,000

=-$510,000 I.e. loss