Packard, Inc., produces and sells mousetraps. The cost of a mousetrap can be broken down as follows:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.23

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.09

Manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.12

Cost per trap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.44

The traps are then sold for 120% of cost, or $0.53 each. The manufacturing overhead is applied based on direct labor costs and was computed at the beginning of the year using the following estimates:

Estimated manufacturing overhead for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . $540,000

Estimated direct labor costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $405,000

Predetermined overhead rate (per direct labor dollar). . . . . . . . . . . . . . . . . . . . . . . . . $ 1.33

For the first six months of the year, overhead costs of $272,000 were actually incurred. For that same time period, actual direct labor costs were $204,000. However, during the year several changes in the production process were made. As a result, by the midpoint of the year, expected manufacturing overhead costs have been significantly reduced below the original estimate of $540,000.

Hence, for the last six months of the year, overhead costs are expected to be $225,000, and direct labor costs are expected to be $202,500.

1. What changes (if any) should be made in the predetermined manufacturing overhead rate for Packard, Inc.?

2. Assuming that per-unit direct materials and direct labor costs will remain the same for the last six months of the year, determine the new cost of a single mousetrap.

3. Because the cost of producing mousetraps dropped during the second half of the year, Packard can reduce the price of its traps and still earn its 20% markup on cost. Should the company reduce the price of its mousetraps? What factors would affect your decision?