Premier Products Solution

PREMIER PRODUCTS, INC. - SOLUTION

TABLE A

PRODUCT A B C D Total

Units produced 1,000 1,000 1,000 1,000

Material $15.00 $ 5.00 $10.00 $ 5.00

+ Labor 30.00 5.00 15.00 10.00

+Variable OH 15.00 7.50 5.00 7.50

= Total var. cost $60.00 $17.50 $30.00 $22.50

+ Fixed overhead $10,000 $10,000 $12,500 $12,500

= Unit cost $70.00 $27.50 $42.50 $35.00

Selling price $98.00 $38.50 $59.50 $49.00

Unit Profit $28.00 $11.00 $17.00 $14.00

Mark-on 40% 40% 40% 40%

Total Profit $28,000 $11,000 $17,000 $14,000 $70,000

The overhead rate for the year is determined by adding together the budgeted variable and fixed overhead costs and dividing this sum by the number of budgeted labor hours. The standard cost of a product is found by multiplying the number of direct labor hours required to manufacture that product by the overhead rate and adding this quantity to the direct labor and material costs.

Under this allocation method the allocation rate is:

Budgeted variable overhead $35,000

Budgeted fixed overhead 45,000

Budgeted total overhead costs $80,000

Budgeted labor hours 12,000

Allocation rate per hour $6.67

Arnold then calculated the mark-on for the four products using the standard cost for each product based on allocating the overhead costs using direct labor hours.

PRODUCT A B C D

Selling price $98.00 $38.50 $59.50 $49.00

Unit cost $85.00 $16.67 $45.00 $28.33

Profit $13.00 $21.83 $14.50 $20.67

Mark-on percentage 15% 131% 32% 73%

QUESTION 1

1. If Premier maintains its rule about dropping products with a mark-on below 25%, which additional products, if any, will it drop?

Variable and fixed overhead costs are allocated at the rate of $10.36 per direct labor hour (from the case).

PRODUCT B C D