Outerwear Inc. is concerned about the profitability of its regular gloves. Company managers are considering producing only the top-quality, fleece lined, gloves.

The company is currently assigning the \(\$ 2,000,000\) of overhead costs to both types of gloves based on machine hours. Of the overhead, \(\$ 800,000\) is utilities related and the remainder is primarily related to quality control inspectors' salaries. The following information about the products is also available:

a. Determine the total overhead cost assigned to each type of gloves using the current allocation system.

b. Determine the total overhead cost assigned to each type of gloves if more appropriate cost drivers were used.

c. Should the company stop producing the regular gloves? Explain.

Transcribed Image Text:

Number produced.. Machine hours Inspection hours. Revenues... Direct costs. Regular Fleece-Lined 2,000,000 1,400,000 170,000 30,000 10,000 50,000 $5,600,000 $5,000,000 $4,400,000 $6,400,000