Parvee Company manufactures two products: PAR, which sells for $100; and VEE, which sells for $200. Estimated cost and production data for the current year are as follows:

In addition, fixed manufacturing overhead is estimated to be $2,500,000 and variable overhead is estimated to equal $2.50 per direct labor hour. Parvee desires a 10 percent return on sales for all of its products.

Instructions
a. Calculate the target cost for both PAR and VEE.
b. Estimate the total manufacturing cost per unit of each product if fixed overhead costs are assigned to products on the basis of estimated production in units. Which of theproducts is earning the desired return?
c. Recalculate the total manufacturing cost per unit if fixed overhead costs are assigned to products on the basis of direct labor hours. Which of the products is earning the desired return? (Round to the nearest penny.)
d. Given the confusing results of parts b and c, Parvee’s production manager decides to perform an activity analysis of fixed overhead. The results of the analysis are as follows:

Estimate the total manufacturing cost per unit of each product if activity-based costing is used for assigning fixed overhead costs. Under this method, which product is earning the desired return?
e. What proportion of fixed overhead is value-added? In attempting to reach the target cost for VEE, which activity would you look to improving first and why?
f. Parvee’s production manager believes that design changes would reduce the number of set-ups required for VEE to 75. Fixed overhead costs for set-up would remain unchanged. What will be the impact of the design changes on the manufacturing costs of both products? Which of the products will earn the desired return?
g. An alternative to the design change is to purchase a new machine that will reduce the number of set-ups for PAR to 50 and the number of set-ups for VEE to 140. The machine also will reduce fixed set-up costs to $275,500. Calculate the manufacturing costs for each product if the machine is purchased. Should VEE be redesigned or should the machine be purchased?Why?

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PAR VEE Direct materials cost Direct labor cost ( $10/hr.) Estimated production (units) $25 $40 $20 $50 30,000 10,000 Demands PAR 100 300 VEE 300 100 4,000 Costs Driver Activity Machine set-ups . . . .. . Purchase orders Machining Inspection Shipping to customers $ 350,000 650,000 500,000 300,000 200,000 2,000,000 # of set-ups # of orders #Of machine-hours # of batches # of shipments . . . . 3,000 40 400 20 100 Total fixed overhead. . . .