Chapter 2, Problem 4AE

To determine

Selling price: The cost incurred by selling the product in the market is known as the selling price.

Determine the selling price for Job 408 when the machine hours in Assembly department are restored to 3000 hours and the Direct Labor hours in the said department are reduced from 80000 hours to 50000 hours.

Answer to Problem 4AE

Solution:

The pre-determined rate per direct labor hour increases from $10 to 13.75. As a result of which the total cost increases leading to an ultimate increase in the selling price for Job 408.

Explanation of Solution

The calculation is done in the workbook and it is explained below,

	Chapter 2: Applying Excel
	Data
	Mark-up on job cost	75%
		Department
		Milling	Assembly
1	Machine hours	60000	6000
2	Direct Labour Hours	8000	50000
3	Total fixed manufacturing overhead cost	$3,90,000.00	$5,00,000.00
4	Variable manufacturing overhead per machine hour	$2.00	$ -
5	Variable manufacturing overhead per direct labour hour	$ -	$3.75
	Cost Summary for job 408	Department
		Milling	Assembly
6	Machine hours	40	10
7	Direct Labour Hours	2	6
8	Direct Materials	$700.00	$360.00
9	Direct Labour cost	$50.00	$150.00
	Enter a formula into each of the cells marked with ? below
	Step 1: Calculate the estimated total manufacturing overhead cost for each department
		Milling	Assembly
10	Total fixed manufacturing overhead (given)	$3,00,000.00	$5,00,000.00
11	Variable manufacturing overhead per machine hour or direct labour hour (given)	$2.00	$3.75
12	Total machine hours or direct labour hours (given)	60000	50000
13	Total Variable manufacturing overhead (11 x 12)	$1,20,000.00	$1,87,500.00
14	Total manufacturing overhead (10 + 13)	$4,20,000.00	$6,87,500.00
	Step 2: Calculate the pre-determined overhead rate in each department
		Milling	Assembly
15	Total manufacturing overhead (14)	$4,20,000.00	$6,87,500.00
16	Total machine hours or direct labour hours (given)	60000	50000
17	Pre-determined overhead rate per machine hour or direct labour hour (15 divided by 16)	$7.00	$13.75
	Step 3: Calculate the amount of overhead applied to both departments to Job 408
		Milling	Assembly
18	Pre-determined overhead rate per machine hour or direct labour hour (17)	$7.00	$13.75
19	Machine hours or direct labour hours for the job (given)	40	6
20	Manufacturing overhead applied (18 x 19)	$280.00	$82.50
	Step 4: Calculate the total job cost for Job 408
		Milling	Assembly
21	Direct Materials (given)	$700.00	$360.00
22	Direct Labour cost (given)	$50.00	$150.00
23	Manufacturing overhead applied (20)	$280.00	$82.50
24	Total cost of Job 407 (21 + 22 + 23)	$1,030.00	$592.50
	Total cost of Job 407 (Milling + Assembly)	$1,622.50
	Step 5: Calculate the selling price for Job 408
		Milling	Assembly
25	Total cost of Job 407 ( 24)	$1,030.00	$592.50
26	Mark-up (24 x 75%)	$772.50	$444.38
27	Selling price of Job 407 (25 + 26 )	$1,802.50	$1,036.88
28	Total Selling Price of Job 408 (Milling + Assembly)	$2,839.38

Conclusion

When the direct labor hours are reduced from 80000 hours to 50000 hours, the cost increases since the pre-determined rate per direct labor hour increases from $10 to $13.75. As a result of which the total cost increases leading to an ultimate increase in the selling price.

Since selling price is calculated as per the Cost plus Markup method it is directly related to an increase or a decrease in the cost.