Question

SmartArt Raviaw Charts ants Tablas Styles Paragraph AaBbCcDdEe A Normal Text Box 21 Parrish Metal Bearings produces two sizes of metal bearings (sold by the crate) standard and heavy. The standard bearings require $200 of direct materials per unit (per crate) and the heavy bearings require $245 of direct materials per unit. The operation is mechanized and there is no direct labor. Parrish uses a single plantwide allocation rate for manufacturing overhead, based on machine hours. The direct material cost and unit price are as follows: 1. Premium $245.00 Standard $200.00 Per unit Direct material cost 370.00 Price per unit 350.00 Parrish has been struggling financially and is looking at a number of changes including changing its method of allocating overhead. Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown below: Estimated Cost Activities: Metal fabrication $420,000 Machine processing Packaging Total overhead cost $152,000 $17,000 $589,000 Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of mettal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of premium bearings to be produced during the year. Additional data on a per unit basis was as given below: Standard Premium 4.00 60.00 Kilos per unit Machine hours per unit 2.00 80.00 Parrish's strategy has been to sell more of the premium product. You have been hired to analyze Parrish's strategy. Do you agree with their strategy? You must support your work 210 of 287 Sec Pages: 1 of 1 Words: 1 2048

Answer 1

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Parrish Metal Bearings
	Standard	Premium
Units produced	4,000.00	1,000.00	A
Metal required per unit	2.00	4.00	B
Total Metal required (kilos)	8,000.00	4,000.00	C=A*B
Machinery Hours per unit	80.00	60.00	D
Total Machinery Hours required	320,000.00	60,000.00	E=A*D
Calculation of ABC rates for		F	G	H=F/G
Activity cost pool	Activity Measure	Cost	Total
Metal fabrication	Metal used	420,000.00	12,000.00	35.00
Machine Processing	Machine hours	152,000.00	380,000.00	0.40
Packaging	Units	17,000.00	5,000.00	3.40
Total overhead Cost		589,000.00
		See H	I	J=H*I	K	L=H*K
Allocation table			Standard		Premium
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned
Metal fabrication	Metal used	35.00	8,000.00	280,000.00	4,000.00	140,000.00
Machine Processing	Machine hours	0.40	320,000.00	128,000.00	60,000.00	24,000.00
Packaging	Units	3.40	4,000.00	13,600.00	1,000.00	3,400.00
Total Cost assigned				421,600.00		167,400.00	M
Units produced				4,000.00		1,000.00	See A
Overhead per unit				105.40		167.40	N=M/A
Contribution margin income statement
Particulars	Standard	Premium	Total
Selling price per unit	350.00	370.00
Material cost per unit	200.00	245.00
Overhead per unit	105.40	167.40		See N
Contribution per unit	44.60	(42.40)
Contribution per unit of Premium is negative. So that should not be produced more. I do not agree with Parrish's strategy,