AIP 10.7 Overhead Costs from a New Factory Karsten is one of the premier carpet manufacturers in the world. It manufactures carpeting sales each account for about 50 percent of total revenues. The firm is organized into three departments: Manu facturing, Residential Sales, and Commercial Sales. Manufacturing is a cost center and the two sales departments are profit centers. The full cost of each roll of carpeting produced (including fully absorbed overhead) is transferred to the sales department ordering the carpet. The evaluation of the sales departments includes the fully absorbed cost of each roll as the transfer price. The current manufacturing plant is operating at capacity. A new plant is being built that will more than double capacity. Within two years, management believes that its businesses will grow such that most of the excess capacity will be eliminated. When the new plant comes online, the plan is for one plant to produce exclusively commercial carpeting and the other to produce exclusively residential carpeting. This change will simplify scheduling, ordering, and inventory control in each plant. It will also create some economies of scale by producing longer mill runs. Nevertheless, it will take a couple of years before these economies of scale can be realized. Each mill produces carpeting in four-meter-wide rolls of up to 100 meters in length. The output of each mill is measured in terms of meters of four-meter rolls produced. Overhead is assigned to carpet rolls using carpet meters produced in the mill. The cost structure of each plant is as follows: for both residential and commercial applications. Home sales and commercial Old Plant New Plant Normal machine hours per year 6,000 5,000 Normal carpet meters per hour 1,000 1,400 Normal capacity 6,000,000 meters 7,000,000 meters Annual manufacturing overhead costs excluding accounting depreciation €15,000,000 €21,000,000 Accounting depreciation per year € 6,000,000 €21,000,000 Karsten's new mill will run at higher speed and therefore produce more meters of carpet per hour. Moreover, the new mill will use 15 percent less direct materials and direct labor because the new machines, being more automated, produce less scrap and