Each mill produces carpeting in $12-$foot$-$wide rolls that are $100$ yards in length. The output of

each mill is measured in yards produced. Overhead is allocated to carpet rolls using carpet

yards as a cost driver. The expected cost structure for each plant is as follows:

Old Mill New Mill

Normal machine hours per year $6,0005,000$

Normal carpet yards per hour $1,0001,400$

Normal capacity $6$ million yards $7$ million yards

Annual manufacturing overhead costs

$($excluding accounting depreciation$)$ $$15,000,000$ $$21,000,000$

Accounting depreciation per year $$6,000,000$ $$21,000,000$

In addition to being able to run at higher speeds $($thus producing more yards of carpet per

hour$),$ the new mill will use $15\%$ less direct material and direct labor because the new mill will

have more automated machines that produce less scrap and require less labor per yard of

carpet.

An example job$-$cost sheet run at the old mill is:

Carpet A$4418$: $(100-$yard roll$)$

Direct material $ $800$

Direct labor $ $600$

Total Direct Costs $$1,400$

AC $561,2024$ Take Home Assignment $($for class discussion on Feb $23$rd$)$

Although the new mill has lower direct costs than the old mill, higher overhead costs have the

sales department managers nervous. Both sales managers are lobbying senior management to

have the old mill assigned as their production facility $($i$.$e$.,$ neither sales manager wants their

carpet produced at the new mill$).$ The commercial sales manager argues, $$More of my

customers are located closer to the old mill compared to residential customers. Therefore, to

economize on transportation costs, my products should be produced in the old mill.$$

The residential sales department manager counters with the following argument:

$$Transportation costs are less than $1\%$ of total revenues. The new mill should produce

commercial products because we expect new commercial product to use more synthetic

material and the modern technology at the new mill is better able to adapt to the new

synthetics.$$

Senior management considers both arguments specious, but is nevertheless worried about how

to deal with the reluctance to have products produced at the new mill.

One suggestion has been for each mill to produce about half of commercial sales$$ products and

about half residential sales$$ products. Owners of Georgia Carpet Mill consider this suggestion

$$off limits$$ because splitting production would eliminate most of the efficiencies and

economies of scale that motivated the decision to build the second manufacturing plant.

Each mill will be dedicated to one market segment $($per the owner$$s decree$).$

Things to do:

a$.$ Calculate overhead rates for the new mill and the old mill, where overhead is assigned

to carpet based on normal yards of carpet per year at each mill. $($This is a basic

$$overhead $/$ cost driver$$ calculation.$)$

b$.$ Calculate the expected total cost for carpet A$4418($i$.$e$.,$ the example product$)$ if the

production run occurred at the old vs$.$ new mill. $($You should find that carpet is more

expensive to make at the new mill; thus, you should verify the sales manager