We just can't seem to make any money, exclaimed the President. Profits are falling every month. This
Question:
"We just can't seem to make any money", exclaimed the President. "Profits are falling every month. This month we lost money. What is going on?"
A quick look at the books revealed that the company had $250,000 in manufacturing overhead costs. The $250,000 had traditionally been applied based on Direct Labour hours. The company used 10,000 Direct Labour hours, so a pre-determined rate of $25 per Direct Labour Hour was used.
Product Y | Product Z | ||||
Direct Materials | $10 | $18 | |||
Direct Labour | |||||
(1 hour) | $20 | ||||
(2 hours) | $40 | ||||
Manufacturing Overhead | $25 | $50 | |||
Total Cost | $55 | $108 | |||
The company has been selling 5 of the cheaper product Y for each unit of Product Z.The company used a 40% markup to cover non-manufacturing operating costs.
Product Y | Product Z | ||||
Selling Price | $77.00 | $151.20 | |||
An in-plant study recently revealed that the $250,000 could be traced to the following activities:
Activity | Cost | Total Number for Year |
Material moves | $30,000 | 15,000 moves |
Inspections | $20,000 | 20,000 inspections |
Machinery hours | $90,000 | 9,000 machine hours |
Testing | $10,000 | 5,000 tests |
Setups | $60,000 | 60,000 setups |
Receiving | $40,000 | 10,000 orders processed |
$250,000 |
Further inspection revealed the following activities related to Products Y and Z.
Product Y | Product Z | |
Material moves | 3 | 4 |
Inspections | 2 | 3 |
Machinery hours | 2 | 1 |
Testing | 3 | 3 |
Setups | 4 | 6 |
Receiving | 2 | 1 |
Required:Advise the President on the cause and solution for the current dilemma.
Determine what the new selling prices should be for Products Y and Z.
Fundamentals of Case Management Practice Skills for the Human Services
ISBN: 978-1305094765
5th edition
Authors: Nancy Summers