Foto-Fast Copy Shop provides a variety of photocopying and printing services. On June 5, the owner invested in some computer-aided photography equipment that enables customers to reproduce a picture or illustration, input it digitally into the computer, enter text into the computer, and then print out a four-color professional quality brochure. Prior to the purchase of this equipment, Foto-Fast Copy Shop’s overhead averaged $37,500 per year. After the installation of the new equipment, the total overhead increased to $90,000 per year. Foto-Fast Copy Shop has always costed jobs on the basis of actual materials and labor plus overhead assigned using a predetermined overhead rate based on direct labor hours. Budgeted direct labor hours for the year are 7,500, and the wage rate is $8 per hour.
1. What was the predetermined overhead rate prior to the purchase of the new equipment?
2. What was the predetermined overhead rate after the new equipment was purchased?
3. Suppose Rick Anselm brought in several items he wanted photocopied. The job required 600 sheets of paper at $0.02 each and 45 minutes of direct labor time. What would have been the cost of Rick’s job on May 20? On June 20?
4. Suppose that the owner decides to calculate two overhead rates, one for the photocopying area based on direct labor hours as before, and one for the computer-aided printing area based on machine time. Estimated overhead applicable to the computer-aided printing area is $52,500, and forecasted usage of the machines is 2,000 hours. What are the two overhead rates? Which overhead rate system is better—one rate or two?