Super Sounds Inc manufactures two models of stereo speaker sets
Super Sounds, Inc. manufactures two models of stereo speaker sets. The company uses an absorption (or full) product-costing system, which means that both variable and fixed overhead are included in the product cost. Cost estimates for the two models for the coming year are as follows:

Each stereo speaker set requires 10 hours of direct labor. Each Standard model set requires two hours in Department I and eight hours in Department II. Each set of the deluxe model requires eight hours in Department I and two hours in Department II. The manufacturing overhead costs expected during the coming year in Departments I and II are as follows:

The expected operating activity for the coming year is 37,500 direct-labor hours in each department.

1. Show how Super Sounds, Inc., derived its predetermined overhead rate.
2. What will be the price of each model stereo speaker set if the company prices its products at absorption manufacturing cost plus 15 percent?
3. Suppose Super Sounds, Inc., were to use departmental overhead rates. Compute these rates for Departments I and II for the coming year.
4. Compute the absorption cost of each model stereo speaker set using the departmental overhead rates computed in requirement (3).
5. Suppose management sticks with its policy of setting prices equal to absorption cost plus 15 percent. Compute the new price for each speaker model using the product costs developed in requirement (4).
6. Should Super Sounds, Inc., use plantwide or departmental overhead rates? Explain youranswer.
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