Shady Fabrication Group (SFG) manufactures components for manufacturing equipment at several facilities. The company produces two, related, parts at its Park River Plant, the models SF-08 and SF-48. The differences in the models are the quality of the materials and the precision to which they are produced. The SF-48 model is used in applications where the precision is critical and thus requires greater oversight in the production process.

Although sales remain reasonably strong, managers at SFG have noticed that the company is meeting more resistance to the pricing for SF-08, although there seems to be little need for negotiation on the price of the SF-48 model. As a result, the marketing manager at SFG has asked the financial staff to review the costs of the two products to understand better what might be happening in the market.

Manufacturing overhead is currently assigned to products based on their direct labor costs. For the most recent month, manufacturing overhead was $180,000. During that time, the company produced 8,000 units of Model SF-08 and 2,000 units of Model SF-48. The direct costs of production were as follows: 

Management determined that overhead costs are caused by three cost drivers. These drivers and their costs for last month were as follows: 

Required

a. How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead? What is the total cost per unit produced for each product?

b. How much of the overhead will be assigned to each product if direct labor cost is used to allocate overhead? What is the total cost per unit produced for each product?

c. Draft a memo for the marketing manager explaining why the SF-08 might be experiencing resistance in the market along with your recommendation for which costing system to use.

Transcribed Image Text:

Direct materials Direct labor.. SF-08 $160,000 120,000 SF-48 $90,000 80,000 Total $250,000 200,000