Direct estimation vs. using allocated costs (LO1). The following data pertain to the budgeted overhead for Waymire, Inc., which makes wires and coils.

Waymire, Inc., has asked for your help in estimating capacity costs if it implements an ambitious plan to rationalize its product portfolio. The change would also increase the amount of automation in the plant. If implemented, the change would dramatically alter Waymire€™s activity profile. Waymire provides you with the following additional information concerning activity levels before and after the change in product portfolio.

Required:
a. Waymire currently uses labor hours to allocate all capacity costs (including SGA costs) to products. Using the allocation rate per unit of this driver, estimate the capacity cost after the change in operations.
b. Repeat the exercise with machine hours and revenue as the sole drivers.
c. Could you construct a better estimate using a combination of these four drivers to model the change in activity levels?
d. How does the refinement in part (c)bring the analysis closer to direct estimation of capacity costs? Comment on the relative merits and demerits of direct estimation and using allocations to estimate capacitycosts.

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Item Amount Materials hanling and inventory Supervision Payroll Factory administration Machine depreciation Machine operations Sales offices Travel and other customer development Seig administration Total capacity costs $2,400,000 160,000 640,000 1,600,000 3,450,000 1,410,000 840,000 1,200,000 1,500,000 $13,500,000 Eixpected Amount Current Amount (prior to change (afte the change $48,000,000 Item Materials cost Labor hours Machine hours Revenue $52,000,000 121,500 132,300 $175,000,000 135,000 hours 81,000 hours $162,000,000