Phalanges Systems, Inc. $($PSI$)$ makes keypads that it sells to manufacturers of products such as ATMs and PIN

machines. The average materials cost per keypad is $$4\mathrm{.}70,$ and the average labor cost is $$1\mathrm{.}45.$ PSI incurs

approximately $$5,900,000$ of fixed manufacturing overhead costs annually. The marketing department estimated

that PSI would sell approximately $850,000$ keypads during the coming year. Unfortunately, PSI has experienced a

steady decline in sales even though the overall industry has had an increase in the number of keypads sold. The chief

accountant, Hanna Fields, was overheard saying that when the predetermined overhead rate was calculated, the

accounting department deliberately lowered the estimated number of keypads expected to be sold because it had

lost faith in the marketing department's ability to deliver on its estimated sales numbers. Ms$.$ Fields explained, "This

way, our actual cost is always below the estimated cost. It is about the only way we continue to make a profit."

Indeed, the company had a significant amount of overapplied overhead at the end of each year.

Questions

Explain how the overapplied overhead affects the determination of year$-$end net income.

Assume that Ms$.$ Fields used $750,000$ keypads as the estimated sales to calculate the predetermined overhead

rate. Determine the difference in expected cost per keypad she calculated and the cost per keypad that would result

if the marketing department's estimate $(850,000$ units$)$ had been used.

Assuming that PSI uses a cost$-$plus pricing policy, speculate how Ms$.$ Fields' behavior could be contributing to the

decline in sales.