Weston Corporation manufactures a product that is available in both a deluxe and a regular model. The company has made the regular model for years; the deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined. Sales of the deluxe model have been increasing rapidly. Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $3,080,000 in overhead costs would be incurred and the company would produce and sell 10,000 units of the deluxe model and 50,000 units of the regular model. The deluxe model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Materials and labor costs per unit are given below: Deluxe RegularDirect materials cost per unit $50.00 $30.00Direct labor cost per unit $30.00 $15.00Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of each model. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. . It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed below:activity cost pool and activity measureestimated overhead headactivitydeluxeregulartotalPurchase orders (number of orders)$60,00050010001500Rework requests (number of requests) 280,0008002,0002,800Product testing (number of tests)240,0007,0003,00010,000Machine-related (machine-hours)2,500,0004,5008,00012,500 3080000 Can you identify a possible explanation for the company’s declining profits? If so, what is it?

The overhead rate is the rate or the cost that is being alloted to the product production.

Answered: Weston Corporation manufactures a…

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter7: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 64P: Suppose that Kicker had the following sales and cost experience (in thousands of dollars) for May of...

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Weston Corporation manufactures a product that is available in both a deluxe and a regular model. The company has made the regular model for years; the deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined. Sales of the deluxe model have been increasing rapidly. Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $3,080,000 in overhead costs would be incurred and the company would produce and sell 10,000 units of the deluxe model and 50,000 units of the regular model. The deluxe model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Materials and labor costs per unit are given below:

Deluxe Regular

Direct materials cost per unit $50.00 $30.00

Direct labor cost per unit $30.00 $15.00

Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products. Compute the unit product cost for one unit of each model. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. . It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed below:

activity cost pool and activity measure	estimated overhead head	activity
deluxe	regular	total
Purchase orders (number of orders)	$60,000	500	1000	1500
Rework requests (number of requests)	280,000	800	2,000	2,800
Product testing (number of tests)	240,000	7,000	3,000	10,000
Machine-related (machine-hours)	2,500,000	4,500	8,000	12,500
	3080000