Advanced Medical (AM) manufactures four different blood oxygen level monitors (A300, B400, C500, and D600) at its Denver plant. The Denver plant opened four years ago and was built with the expectation of producing annually 4,000, 5,000, 6,000, and 7,000 of the A300, B400, C500, and D600 monitors, respectively. However, a recession has reduced the demand for all medical devices. The following table reports the number of units of each monitor AM has sold (Last Year and This Year) and expects to sell Next Year.

AM uses a flexible budget to estimate its manufacturing overhead and manufacturing over-head rate. Overhead is assigned to the four monitors using direct labor dollars ( i. e., manufacturing volume is measured as direct labor dollars). For Next Year, AM budgets $ 6.5 million for fixed manufacturing overhead and $ 0.90 per direct labor dollar for variable overhead. Budgeted direct labor dollars per monitor are $ 25, $ 24, $ 23, and $ 22 for the A300, B400, C500, and D600 monitors, respectively.

a. Calculate AM’s budgeted manufacturing volume for Next Year.
b. Using your budgeted manufacturing volume in part (a), compute AM’s manufacturing overhead rate for Next Year.
c. Discuss how you chose Next Year’s budgeted volume in part ( a ). In other words, what are the advantages and disadvantages of the method you used to compute Next Year’s budgeted manufacturingvolume?

  • CreatedDecember 15, 2014
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