Sounds Fine, Inc. manufactures two models of stereo speakers. Cost estimates for the two models for the coming year are as follows:
| Basic Model | Advanced Model |
Direct material | $160 | $260 |
Direct labor (10 hours at $14 per hour) | 140 | 140 |
Manufacturing overhead* | 100 | 100 |
Total cost | $400 | $500 |
*The predetermined overhead rate is $10 per direct-labor hour. | ||
Each stereo speaker requires 10 hours of direct labor. Each Basic Model unit requires two hours in Department I and eight hours in Department II. Each unit of the Advanced Model requires eight hours in Department I and two hours in Department II. The manufacturing overhead costs expected during the coming year in Departments I and II are as follows:
| Department I | Department II |
Variable overhead | $8 per direct-labor hour | $4 per direct-labor hour |
Fixed overhead | $1 50,000 | $150,000 |
The expected operating activity for the coming year is 37,500 direct-labor hours in each department.
Required:
1. Show how Sounds Fine, Inc. derived its predetermined overhead rate.
2. What will be the price of each model stereo speaker if the company prices its products at absorption manufacturing cost plus 15 percent?
3. Suppose Sounds Fine, Inc. were to use departmental overhead rates. Compute these rates fur Departments I and II for the coming year.
4. Compute the absorption cost of each model stereo speaker using the departmental overhead rates computed in requirement (3).
5. Suppose management sticks with its policy of setting prices equal to absorption cost plus 15 percent. Compute the new price for each speaker model using the product costs developed in requirement (4).
6. Should Sounds Fine, Inc. use plantwide or departmental overhead rates? Explain your answer.
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