Constellation Telecommunications Ltd manufactures two different fax machines for the business market cost estimates for the two models for the current year are as follows:
Each model of fax machine requires 20 hours of direct labour. The basic system requires 5 hours in Department A and 15 hours in Department B. The advanced system requires 15 hours in Department A and 5 hours in Department B. The budgeted overhead costs in these two production departments are as follows:
The firm’s management expects to operate at a level of 20,000 direct labour hours in each production department during the current year.
1. Show how the company’s predetermined overhead rate was determined.
2. If the firm prices each model of fax machine at 10 per cent over its cost, what will be the price of each model?
3. Suppose the company were to use predetermined departmental overhead rates. Calculate the rate for each of the two production departments.
4. Calculate the product cost of each model, using the departmental overhead rates calculated in requirement 3.
5. Calculate the price to be charged for each model, assuming the company continues to price each product at 10 per cent above cost. Use the revised product costs calculated in requirement 4.
6. Write a memo to the managing director of Constellation Telecommunications making a recommendation as to whether the firm should use a plantwide overhead rate or departmental rates. Consider the potential implications of the overhead rates and the firm’s pricing policy. Now might these considerations affect the firm’s ability to compete in the marketplace?