Catlow Corporation is trying to estimate the costs associated with increased volume of operations. The firm currently

Question:

Catlow Corporation is trying to estimate the costs associated with increased volume of operations. The firm currently has a capacity for 10,000 machine hours, spread over five machines. That is, each machine provides 2,000 hours of capacity. It is not feasible to buy machines with smaller capacity (e.g., to buy a machine with 480 hours or capacity, or rent a machine on a half-time basis).
Currently, the firm makes two products, Alpha and Beta. Alpha, with a volume of 2,900 units, takes two machine hours per unit. Beta, with a volume of 1,400 units, consumes three machine hours per unit. Each machine hour costs has a variable overhead rate of $20 per machine hour (for power, oils, lubricants and other consumable items), and $30 as an allocation for fixed costs (e.g., machine depreciation).
Catlow is considering expanding the volume of its operations to produce 3,400 units of Alpha and 2,000 units of Beta.

Required:
a. Using the cost per machine hour to estimate capacity costs, calculate the total cost of machining time for the two products.
b. How could you refine the estimate in part (a) above? What conclusions do you draw about the relative costs and benefits of direct estimation of capacity costs versus using allocated costs to estimate them?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  answer-question

Managerial accounting

ISBN: 978-0471467854

1st edition

Authors: ramji balakrishnan, k. s i varamakrishnan, Geoffrey b. sprin

Question Posted: