Amalfi Texts specializes in printing textbooks for high school science classes. Publishing companies like McGraw-Hill contract with authors to prepare the manuscript, which is then copyedited and typeset. Amalfi receives the typeset manuscript electronically and then prints and binds the textbook. The Printing Department prints the pages and the Binding Department assembles the book and attaches the cover. Each department has its own overhead rate. Overhead rates in both departments are based on expected volume. Volume in the Printing Department is measured by the total number of pages printed in the year, and volume in the Binding Department is measured by the total number of books bound in the year. The following table summarizes expected volume, fixed overhead in each department, and the expected variable overhead per unit of volume in each department.
| Printing | Binding | |
| Fixed overhead (millions) | $3.60 | $1.46 |
| Volume measure | Number of pages | Number of books |
| Variable overhead per unit of volume | $0.02 | $1.25 |
| Expected number of pages | 240,000,000 | |
| Expected number of books | 400,000 |
Required:
a. Calculate the overhead rates Amalfi Texts will use for the year in the Printing and Binding departments.
b. During the year, Amalfi prints and binds 10,000 copies of Zhang’s Modern Biology. Each copy of the Zhang text has 550 pages. Direct labor in the Printing and Binding departments for the Zhang book was $13,500 and $19,000, respectively, and direct materials in the Printing and Binding departments were $61,000 and $21,500, respectively. Calculate the total cost of producing the Zhang book.
c. Amalfi’s total production for the year (including the Zhang book) was 410,000 books with 250 million pages. Actual overhead incurred in the Printing and Binding departments amounted to $8.82 million and $2.185 million, respectively. Calculate the over- or underabsorbed overhead in each department and for the entire firm for the year.
d. Instead of using expected volume, had Amalfi used normal volume (288 million pages and 480,1 books), how much over- or underabsorbed overhead would Amalfi have for the year?
e. Discuss the various factors (reasons) why Amalfi might want to use normal versus expected volume in calculating its overhead rates.
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