Achmad Faizal Azmi (361160) 4-51 A. Calculate the plantwide cost driver rate and use this rate to assign overhead costs to products. Calculate the gross margin for each product and calculate the total gross margin. The plantwide cost driver rate is $122,000/(2,400 + 1,440 + 720 +320) = $25.00 per direct labor hour Unit gross margin:
Selling price Materials cost Labor cost Overhead Total cost Gross Margin
A $ 15 4 7.2 6 17.2 $ (2.2)
B $ 18 5 5.4 4.5 14.9 $ 3.1
C $ 20 6 3.6 3 12.6 $ 7.4
D $ 22 7 2.4 2 11.4 $ 10.6
B $ 144,000 40,000 43,200 36,000 119,200 $ 24,800
C $ 120,000 36,000 21,600 18,000 75,600 $ 44,000
D $ 88,000 28,000 9,600 8,000 45,600 $ 42,400
Total gross margin:
Seliing price Materials cost Labor cost Overhead Total cost Gross Margin
A $ 150,000 40,000 72,000 60,000 172,000 $ (22,000)
Total $ 502,000 144,000 146,400 122,000 412,400 $ 89,600
b.
If any product is unprofitable in part a, drop this product from the mix. Recalculate the cost driver rate based on the new total direct labor hours remaining in the plant and use this rate to assign overhead costs to the remaining three products. Calculate the gross margin for each product and calculate the total gross margin. After dropping product A, the plantwide cost driver rate is $122,000/(1,440 + 720 +320) = $49.1935 per direct labor hour Unit gross margin:
Selling price Materials cost Labor cost Overhead Total cost Gross Margin
B $ 18 5 5.4 8.85 19.25 $ (1.25)
C $ 20 6 3.6 5.9 15.5 $ 4.5
D $ 22 7 2.4 3.94 13.34 $ 8.66
Total gross margin:
Selling price Material cost Labor Cost Overhead Total cost Gross margin
B $ 144,000 40,000 43,800 70,839 154,039 $ (10,039)
C $ 120,000 36,000 21,600 35,419 93,019 $ 26,981
D $ 88,000 28,000 9,600 15,742 53, 342 $ 34,658
Total $ 352,000 104,000 74,400 122,000 300,400 $ 51,600
c. Drop any product that is unprofitable with the revised cost assignment. Repeat the process, eliminating any unprofitable products at each stage. After further dropping product B, the plantwide cost driver rate is $122,000/(720 +320) = $117.3077 per direct labor hour Unit gross margin: C $ 20 6 3.6 14.08 23.68 $ (3.68)
Selling price Material cost Labor cost Overhead Total cost Gross margin
D $ 22 7 2.4 9.38 18.78 $ 3.22
Total gross margin:
Selling price Material cost Labor cost Overhead Total cost Gross margin
C $ 120,000 36,000 21,600 84,462 142,062 $ (22,062)
D $ 88,000 28,000 9,600 37,538 75,138 $ 12,862
Total $ 208,000 64,000 31,200 122,000 217,200 $ (9,200)
Now product C appears unprofitable. After further dropping product C, the plantwide cost driver rate is $122,000/320 = $381.25 per direct labor hour Unit gross margin for product D:
Selling price Material cost Labor cost Overhead Total cost
D $ 22 7 2.4 30.5 39.5
Gross margin
$ $17.9
Total gross margin for product D:
Selling price Material cost Labor cost Overhead Total cost Gross margin
D $ 88,000 28,000 9,600 122,000 159,600 $(71,600)
d. What is happening at Youngsborough and why? How could this situation be avoided? Youngsborough has faced a complicated situatuon by using planned levels of direct labor hours in the denominator for the cost driver rates. In Youngsborough’s situation, the capacity-related overhead costs are fixed. Therefore, dropping unprofitable product A made the cost driver rate increase, which consequently making product B look unprofitable. This cycle will continue until Youngsborough had no profitable products anymore. This situation would likely have been avoided if Youngsborough had used practical capacity direct labor hours in the denominator for the cost driver rate. The cost driver rate would then have remained unchanged when the company dropped product A, so the remaining products would appear as profitable as they were before. However, the company would then have underapplied overhead (idle capacity costs), and should explore opportunities to use the idle capacity productively, such as increasing sales of the remaining products or developing new profitable products.
