When Dart Products started operation five years ago, its only product was a radar detector known as
Question:
When Dart Products started operation five years ago, its only product was a radar detector known as the Bear Detector. The production system was simple, with Bear Detectors manually assembled from purchased components. With no ending work-in-process inventories, unit costs were calculated once a month by dividing current manufacturing costs by units produced.
Last year, Dart Products began to manufacture a second product, code-named the Lion Tamer. The production of Lion Tamers involves both machine-intensive fabrication and manual assembly. The introduction of the second product necessitated a change in the firm’s simple accounting system. Dart Products now separately assigns direct material and direct labor costs to each product using informa- tion contained on materials requisitions and work tickets. Manufacturing overhead is accumulated in a single cost pool and assigned on the basis of direct labor hours, which is common to both products. Following are last year’s financial results by product:
Management is concerned about the mixed nature of last year’s financial performance. It appears that the Lion Tamer is a roaring success. The only competition, the Nittney Company, has been selling a competing product for considerably more than Dart’s Lion Tamer; this company is in financial diffi- culty and is likely to file for bankruptcy. The management of Dart Products attributes the Lion Tamer’s success to excellent production management. Management is concerned, however, about the future of the Bear Detector and is likely to discontinue that product unless its profitability can be improved. You have been asked to help with this decision and have obtained the following information:
• The labor rate is $15 per hour.
• Dart has two separate production operations, fabrication and assembly. Bear Detectors undergo
only assembly operations and require 2.5 assembly hours per unit. Lion Tamers undergo both fabrication and assembly and require 1.5 fabrication hour and 0.5 assembly hour per unit.
• The annual Fabricating Department overhead cost function is:
$200,000 + $5 (labor hours)
• The annual Assembly Department overhead cost function is:
$20,000 + $11 (labor hours)
You may need to review materials in Modules 16 and 17 to complete this case.
Evaluate the profitability of Dart’s two products and make any recommendations you believe appropriate.
