Bergan Brewery uses the latest in modern brewing technology to produce a prize-winning beer. In both 2008 and 2009, Bergan produced and sold 100,000 cases of beer and had no raw materials, work in process, or finished goods inventory at the beginning or end of either year. At the end of 2008, the company installed machines to perform some of the repetitive tasks previously performed with direct labor. At the beginning of 2009, Bergan’s bookkeeper estimated that net income would increase from $530,000 in 2008 to $706,000 in 2009.

However, when actual overhead was used to calculate net income at the end of the year, net income decreased from $530,000 in 2008 to $435,000 in 2009.

Required

A. What potential problems do you see in the bookkeeper’s income estimate for 2009?

B. Based on the information given, would you change the cost driver or predetermined overhead rate for 2009? What cost driver would you suggest? What would be the new predetermined overhead rate?

C. Using the cost driver and predetermined overhead rate you suggested in B, and assuming that 5,000 machine hours will be incurred, recalculate Bergan’s estimated net income for 2009.

D. Bergan has set a goal of increasing net income in 2010 to $550,000. However, sales are expected to be flat. Using the decision model introduced in Chapter 2, identify some options for Bergan Brewery. How might it reach its goal of increasing income to $550,000? What qualitative factors should be considered in itsdecision?

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2008 (Actual) 2009 (Estimated) Beer sales (100,000 cases) Less: Cost of goods sold $1,000,000 $1,000,000 Direct material 150,000 125,000 95,000 150,000 25,000 19,000 Direct labor Applied overhead* $ 630,000 Gross profit Less: Selling and administrative costs $ 806,000 100,000 100,000 Net income $ 530,000 $ 706,000 * For 2009, overhead was applied at the 2008 rate of $9.50 per direct labor hour for an estimated 2,000 hours of direct labor. A total of 10,000 direct labor hours were worked in 2008. Bergan's bookkeeper estimates that 5,000 machine hours will be worked in 2009.