Unchained Music (UM) produces two acoustic and two electric guitars: the Jerry, the Layne, the Mike,...

 

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Unchained Music (UM) produces two acoustic and two electric guitars: the Jerry, the Layne, the Mike, and the Sean. Despite an increase in the volume of orders, UM's profits are declining. New competitors entered the market, which forced the UM to carefully revise its pricing strategy and reduce its costs. Yet, gross profits mysteriously seem to continue shrinking. The direct labour rate is $35 per hour, and direct labour is a variable cost. The cost driver used to allocate manufacturing overhead costs to products at UM is calculated by dividing the total manufacturing overhead costs by the total planned capacity in direct labour hours. Planned capacity is 80,960 direct labour hours per year. The total manufacturing overhead cost is $339,750 per year and none of it is attributable to products so cannot be saved if a product is dropped. The owners of UM, two brothers, want to identify and drop any guitar that is not profitable, that is, any product that would show a negative gross profit. They have provided you with the following TAUBA ( information on the guitars: Planned unit sales Selling price per unit Direct materials cost per unit Direct labour hours per unit Jerry Layne Mike Sean Total 800 720 600 500 2,620 $2,000 $2,500 $3,000 $3,500 $900 $1,200 $1,700 $2,000 26 28 38 Required In all your calculations, keep all the decimals. Round numbers requirement) only at your last step of computations. or down, depending on the Q1) (1 mark) Calculate the plantwide overhead rate, and the gross profit for each product (and for UM). Present your calculations in the following template (use the Excel template provided) and comment on the profitability at UM. Planned unit sales Revenue Direct materials Direct labour Manufacturing overhead Gross profit Planned direct labour hours Jerry Mike Sean Total In Q2 to Q4, assume that dropping a product has no effect on the unit sales of the remaining products and that the direct labour hours of the dropped product would not be used for the production of other products. Q2) (1 mark) Based on the gross profits calculated in Q1, drop any unprofitable guitar from the product mix. Recalculate the overhead rate based on the new total direct labor hours remaining in the plant. Use this revised overhead rate to assign overhead costs to the remaining products. Using the same template as in Q1 (modified to only keep the profitable guitars), calculate the gross profit for each product and for UM and comment on it. Q3) (1 mark) Repeat the same steps as in Q2: drop any product that is unprofitable with the revised cost assignment. Repeat the process and eliminate any unprofitable products at each stage. Comment on the profitability at UM. arg (20 Q4) Which main factor explains why the company's profitability appears to be declining? (0.5 marks) Additionally, describe what UM could specifically change to address this specific issue and improve its profitability. (0.5 marks) Unchained Music (UM) produces two acoustic and two electric guitars: the Jerry, the Layne, the Mike, and the Sean. Despite an increase in the volume of orders, UM's profits are declining. New competitors entered the market, which forced the UM to carefully revise its pricing strategy and reduce its costs. Yet, gross profits mysteriously seem to continue shrinking. The direct labour rate is $35 per hour, and direct labour is a variable cost. The cost driver used to allocate manufacturing overhead costs to products at UM is calculated by dividing the total manufacturing overhead costs by the total planned capacity in direct labour hours. Planned capacity is 80,960 direct labour hours per year. The total manufacturing overhead cost is $339,750 per year and none of it is attributable to products so cannot be saved if a product is dropped. The owners of UM, two brothers, want to identify and drop any guitar that is not profitable, that is, any product that would show a negative gross profit. They have provided you with the following TAUBA ( information on the guitars: Planned unit sales Selling price per unit Direct materials cost per unit Direct labour hours per unit Jerry Layne Mike Sean Total 800 720 600 500 2,620 $2,000 $2,500 $3,000 $3,500 $900 $1,200 $1,700 $2,000 26 28 38 Required In all your calculations, keep all the decimals. Round numbers requirement) only at your last step of computations. or down, depending on the Q1) (1 mark) Calculate the plantwide overhead rate, and the gross profit for each product (and for UM). Present your calculations in the following template (use the Excel template provided) and comment on the profitability at UM. Planned unit sales Revenue Direct materials Direct labour Manufacturing overhead Gross profit Planned direct labour hours Jerry Mike Sean Total In Q2 to Q4, assume that dropping a product has no effect on the unit sales of the remaining products and that the direct labour hours of the dropped product would not be used for the production of other products. Q2) (1 mark) Based on the gross profits calculated in Q1, drop any unprofitable guitar from the product mix. Recalculate the overhead rate based on the new total direct labor hours remaining in the plant. Use this revised overhead rate to assign overhead costs to the remaining products. Using the same template as in Q1 (modified to only keep the profitable guitars), calculate the gross profit for each product and for UM and comment on it. Q3) (1 mark) Repeat the same steps as in Q2: drop any product that is unprofitable with the revised cost assignment. Repeat the process and eliminate any unprofitable products at each stage. Comment on the profitability at UM. arg (20 Q4) Which main factor explains why the company's profitability appears to be declining? (0.5 marks) Additionally, describe what UM could specifically change to address this specific issue and improve its profitability. (0.5 marks)