problem 2

Problem 2: Julia's predicament Julia Barton, owner and manager of Barton Draperies and Window Treatments, has been receiving some complaints from her loyal clientele of interior decorators and home decor consultants. For example, one of her loyal customers, Ashley, wanted to know why she was being charged a much higher price for an order that was almost identical to an order she placed last year. Ashley felt that the price hike was simply not justified. Although Julia, when responding to Ashley's complaint, blamed the price hike on the rising price of materials, she herself was a bit perplexed and decided to look into the matter. Julia asked her accountant to prepare report for her summarizing cost and pricing data for the last three years. The accountant presented this information in the following table: Service consumed by Service departments Profit centers Electricity Water Ingots Stainless Steel Costs Incurred (thousands) $120,000 $80,000 Service provided by Electricity (million kwh) 3,000 3,000 3,600 2,400 Water (million gallons) 1,200 800 1,200 2,400 Julia believes that the last few years have been fairly representative of business volume in general. Moreover, Julia believes the average of the direct labor cost for years 1 and 2 is a fair estimate of her "normal" volume of business Julia next turns her attention to how she prices jobs. When her company receives an order, Julia estimates the direct labor and material costs for the job, and then she applies an overhead amount to the job. Each year, she computes a new budgeted overhead rate per direct labor dollar. Julia then prepares the order quote by adding direct material costs, direct labor costs, applied overhead, and a 50% markup on the total cost Julia retrieves information corresponding to Ashley's order in year 2, and compares it with the price quote the company prepared for Ashley for her most recent order in year 3. Julia is not an accountant, but she is a good manager and can understand why Ashley complained. Required: a. Compute the total overhead application rates for years 1, 2, and 3. b. Compute the over-applied or under-applied overhead for year 1 and year 2. C. The following information pertains to Ashley's order in year 2, and her current order for year 3, which is identical (in terms of the draperies and window treatments) to her year 2 order. Service consumed by Service departments Profit centers Electricity Water Ingots Stainless Steel Costs Incurred (thousands) $120,000 $80,000 Service provided by Electricity (million kwh 3,00 3,00 3,600 2,400 Water (million gallons) 1,200 800 1,200 2,400 Compute the price Julia charged Ashley for her year 2 order and the price quoted for the year 3 order. d. Do you agree with Ashley that the price being quoted for her year 3 order is too high? e. What should Julia do? Can you suggest an alternative way for Julia to develop her price quotes? Explain