Accounting Assignment | Custom Assignment Help
Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company considers all of its manufacturing overhead costs to be fixed and it uses plantwide manufacturing overhead cost allocation based on direct labor-hours. Koontz’s controller prepared the segmented income statement that is shown below for the most recent year (he allocated selling and administrative expenses to products based on sales dollars):
Basic Advanced total number of units produced and sold 20,000 10,000 30,000 Sales$3,000,000 $2,000,000$5,000,000Cost of goods sold 2,300,000 1,350,000 3,650,000Gross margin 700,000 650,000 1,350,000Selling and administrative expenses 720,000 480,000 1,200,000Net operating income (loss)$(20,000)$170,000$150,000
Direct laborers are paid $20 per hour. Direct materials cost $40 per unit for the Basic model and $60 per unit for the Advanced model. Koontz is considering a change from plantwide overhead allocation to a departmental approach. The overhead costs in the company’s Molding Department would be allocated based on machine-hours and the overhead costs in its Assemble and Pack Department would be allocated based on direct labor-hours. To enable further analysis, the controller gathered the following information:
Molding Assemble and Pack TotalManufacturing overhead costs$787,500 $562,500$1,350,000Direct labor-hours: Basic 10,000 20,000 30,000Advanced 5,000 10,000 15,000Machine-hours: Basic 12,000 – 12,000Advanced 10,000 – 10,000
Koontz’s production manager has suggested using activity-based costing instead of either the plantwide or departmental approaches. To facilitate the necessary calculations, she assigned the company’s total manufacturing overhead cost to four activity cost pools as follows:
Activity Cost PoolActivity MeasureManufacturing OverheadMachiningMachine-hours in Molding$417,500Assemble and packDirect Labor-Hours in Assemble and Pack 282,500Order processing number of customer orders 310,000SetupsSetup hours 340,000 $1,350,000
She also determined that the average order size for the Basic and Advanced models is 400 units and 50 units, respectively. The molding machines require setup for each order. One setup hour is required for each customer order of the Basic model and three hours are required to set up for an order of the Advanced model.
Using the additional information provided by the production manager, calculate:
The company pays a sales commissions of 5% for the Basic model and 10% for the Advanced model. Its traceable fixed advertising expenses include $150,000 for the Basic model and $200,000 for the Advanced model. The remainder of the company’s selling and administrative costs are common fixed expenses.
QUESTION 1: Using your activity-based cost assignments from requirement 3, make a contribution format segmented income statement. (Hint: Organize all of the company’s costs into three categories: variable expenses, traceable fixed expenses, and common fixed expenses.)
QUESTION 2: Using your contribution format segmented income statement from requirement 4, calculate the break-even point in dollar sales for the Advanced model.