“Wow! Is that R-92 model ever a loser! It’s time to cut back its production and shift our resources toward the new T-95 model,” said Graham Thomas, executive vice-president of Thomas Products Inc. “Just look at this income statement I’ve received from accounting. The T-95 is generating over eight times as much profit as the R-92 on one-sixth of the unit sales. I’m convinced that our future depends on the T-95.” The year-end statement to which Thomas was referring is shown below:
The numbers sure look that way,” replied Julie Williams, the company’s sales manager. “But why isn’t the competition more excited about the T-95? I know we’ve been producing the model for only three years, but I’m surprised that more of our competitors haven’t recognized what a cash cow it is.” “I think it’s our new automated plant,” replied Thomas. “Now it takes only two direct labour-hours to produce a unit of the R-92 and three direct labour-hours to produce a unit of the T-95. That’s considerably less than it used to take us.” “I agree that automation is wonderful,” replied Williams. “I suppose that’s how we’re able to hold down the price of the T-95. Taylor Company in England tried to bring out a T-95 but discovered they couldn’t touch our price. But Taylor is killing us on the R-92 by undercutting our price with some of our best customers. I suppose they’ll pick up all of our R-92 business if we move out of that market. But who cares? We don’t even have to advertise the T-95; it just seems to sell itself.” “My only concern about automation is how our manufacturing overhead rate has shot up,” said Thomas. “Our total manufacturing overhead cost is $2,700,000. That comes out to be a hefty amount per direct labour-hour, but Dianne down in accounting has been using direct labour-hours as the base for computing overhead rates for years and doesn’t want to change. I don’t suppose it matters as long as costs get assigned to products.”
“I’ve never understood that debit and credit stuff,” replied Williams. “But I think you’ve got a problem in production. I had lunch with Janet, our plant manager, yesterday and she complained about how complex the T-95 is to produce. Apparently they have to do a lot of setups, special soldering, and other work on the T-95 just to keep production moving. And they have to inspect every single unit.” “It’ll have to wait,” said Thomas. “I’m writing a proposal to the board of directors to phase out the R-92. We’ve got to increase our bottom line or we’ll all be looking for jobs.”
1. Compute the predetermined overhead rate based on direct labour-hours that the company used during the year. (There was no underapplied or overapplied overhead for the year.)
2. Direct materials and direct labour costs per unit for the two products are as follows:
Using these data and the rate computed in (1) above, determine the unit product cost of each product under the company’s traditional costing system.
3. Assume that the company’s $2,700,000 in manufacturing overhead cost can be assigned to six activity cost pools, as follows:
Given these data, would you support a recommendation to expand sales of the T-95? Explain your position.
4. From the data you prepared in (3) above, why do you suppose the T-95 “just seems to sell itself”?
5. If you were president of Thomas Products Inc., what strategy would you follow from this point forward to improve the company’s overall profits?

  • CreatedJuly 08, 2015
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