The new president of the Wernecke Company was stumped. Why had profits gone down? He had directed the sales department to push the product with the highest contribution margin, and the sales department had come through with flying colors. The percent of flames sold had increased from 25% of units sold to 37.5% of units sold. So what happened?

The variable overhead for the coming year is estimated to be $3,000,000.

Required:
1. Calculate the Wernecke Company's estimated direct labor hours to produce flims and flames.
2. Calculate the predetermined variable overhead rate that will be used in the coming year using a traditional costing system based upon direct labor hours.
3. Using a traditional costing system based upon direct labor hours, compute the unit product costs for flims and flames as well as contribution margin per unit.
4. It has been suggested to the president to consider the use of an ABC costing system to allocate manufacturing overhead. Engineering studies have revealed the following information about estimated manufacturing activities for the coming year.

Calculate the separate predetermined overhead rates for each of the activities listed above.
The following data is available about the activity levels needed to produce the projected 25,000 units of Flims
Activity Cost PoolEstimated Activity Level for Flims
Setups ...................50 setups
Scrap ....................200 units
Testing................... 2,000 tests
Machine related ............... 12,500 Mhrs.
Calculate the expected variable overhead to be applied to Flims.
5. The following data is available about the activity levels needed to produce the projected 15,000 units of Flams:
Activity Cost PoolEstimated Activity Level for Gadgets
Setups.................150 setups
Scrap................. 300 units
Testing................. 3,000 tests
Machine related............. 87,500 Mhrs.
6. Calculate the expected variable overhead to be applied to Flams.
7. Calculate the total overhead (total for company) that is expected to be applied to Flims and Flams.
8. Calculate the projected unit costs and unit contribution margins for Flims and Flams using ABC costing.
9. What conclusions can you drawn about the use of traditional costing vs. ABC costing for the Wernecke Company? What recommendations do you have for thepresident?

Transcribed Image Text:

Flims S150 Sales Price per Unit Direct Materi als per Unit Direct Labor Cost per Hour Direct Labor Hours per Unit Number of Units Produced Flams S500 S200 S25 5 hours per unit S25 1 hour per unit 25.000 15.000 Activity Cost Pool Estimated Overhead Cost Expected Activity Level Setups Scrap Testing Machine related 850.00 S350 S200 200 setups 500 units 5.000 sts 100,000 Mhrs $1.600.000 Total 3,000,0