Seco, Inc., produces two types of clothes dryers: deluxe and regular. Seco uses a plantwide rate based on direct labor hours to assign its overhead costs. The company has the following estimated and actual data for the coming year:
Estimated overhead ........$2,000,000
Expected activity ........ 50,000
Actual activity (direct labor hours):
Deluxe dryer ........... 10,000
Regular dryer ........... 40,000
Units produced:
Deluxe dryer ............ 20,000
Regular dryer .......... 200,000
Required:
1. Calculate the predetermined plantwide overhead rate and the applied overhead for each product, using direct labor hours.
2. Calculate the overhead cost per unit for each product.
3. What if the deluxe product used 20,000 hours (to produce 20,000 units) instead of 10,000 hours (total expected hours remain the same)? Calculate the effect on the profitability of this product line if all 20,000 units are sold, and then discuss the implications of this outcome.