Unchained Music (UM) produces two acoustic and two electric guitars: the Jerry, the Layne, the Mike, and the Sean. Despite an increase in the volume of orders, UM’s profits are declining.  New competitors entered the market, which forced the UM to carefully revise its pricing strategy and reduce its costs. Yet, gross profits mysteriously seem to continue shrinking.   The direct labour rate is $35 per hour, and direct labour is a variable cost.  The cost driver used to allocate manufacturing overhead costs to products at UM is calculated by dividing the total manufacturing overhead costs by the total planned capacity in direct labour hours.  Planned capacity is 80,960 direct labour hours per year.  The total manufacturing overhead cost is $339,750 per year and none of it is attributable to products so cannot be saved if a product is dropped. The owners of UM, two brothers, want to identify and drop any guitar that is not profitable, that is, any product that would show a negative gross profit.  They have provided you with the following information on the guitars:       Jerry Layne Mike Sean Total Planned unit sales 800 720 600 500 2620 Selling price per unit $2000 $2500 $3000 $3500   Direct materials cost per unit $900 $1200 $1700 $2000   Direct labour hours per unit 26 28 35 38       Question 1 Calculate the plantwide overhead rate, and the gross profit for each product (and for UM). Present your calculations in the following template     Jerry Layne Mike Sean Total Planned Unit Sales                       Revenue           Direct Materials           Direct Labour           Manufacturing Overhead           Gross Profit                       Planned Direct Labour Hours               Assume that dropping a product has no effect on the unit sales of the remaining products and that the direct labour hours of the dropped product would not be used for the production of other products.   Question 2 Based on the gross profits calculated in Q1, drop any unprofitable guitar from the product mix. Recalculate the overhead rate based on the new total direct labor hours remaining in the plant. Use this revised overhead rate to assign overhead costs to the remaining products. Using the same template as in Q1 (modified to only keep the profitable guitars), calculate the gross profit for each product and for UM and comment on it.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Unchained Music (UM) produces two acoustic and two electric guitars: the Jerry, the Layne, the Mike, and the Sean. Despite an increase in the volume of orders, UM’s profits are declining.  New competitors entered the market, which forced the UM to carefully revise its pricing strategy and reduce its costs. Yet, gross profits mysteriously seem to continue shrinking.

 

The direct labour rate is $35 per hour, and direct labour is a variable cost.  The cost driver used to allocate manufacturing overhead costs to products at UM is calculated by dividing the total manufacturing overhead costs by the total planned capacity in direct labour hours.  Planned capacity is 80,960 direct labour hours per year.  The total manufacturing overhead cost is $339,750 per year and none of it is attributable to products so cannot be saved if a product is dropped. The owners of UM, two brothers, want to identify and drop any guitar that is not profitable, that is, any product that would show a negative gross profit.  They have provided you with the following information on the guitars:

 

 

 

Jerry

Layne

Mike

Sean

Total

Planned unit sales

800

720

600

500

2620

Selling price per unit

$2000

$2500

$3000

$3500

 

Direct materials cost per unit

$900

$1200

$1700

$2000

 

Direct labour hours per unit

26

28

35

38

 

 

 

Question 1

Calculate the plantwide overhead rate, and the gross profit for each product (and for UM). Present your calculations in the following template

 

 

Jerry

Layne

Mike

Sean

Total

Planned Unit Sales

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

Direct Materials

 

 

 

 

 

Direct Labour

 

 

 

 

 

Manufacturing Overhead

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

Planned Direct Labour Hours

 

 

 

 

 

 

 

Assume that dropping a product has no effect on the unit sales of the remaining products and that the direct labour hours of the dropped product would not be used for the production of other products.

 

Question 2

Based on the gross profits calculated in Q1, drop any unprofitable guitar from the product mix. Recalculate the overhead rate based on the new total direct labor hours remaining in the plant. Use this revised overhead rate to assign overhead costs to the remaining products. Using the same template as in Q1 (modified to only keep the profitable guitars), calculate the gross profit for each product and for UM and comment on it.

 

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repeat the step from q2: drop any product that is uprofittable with the reviewed cost assignment

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