Please show your work. If you already answered this specific question from me, p
ID: 2418749 • Letter: P
Question
Please show your work. If you already answered this specific question from me, please allow someone else to answer - Thank you!
Ferguson Equipment, Inc. manufactures custom-designed manufacturing equipment. Ferguson had recently received a request to manufacture 40 units of a specialized machine at a price lower than it normally accepts. Marketing manager Emily Dorr indicated that if the order were accepted at that price, the company could expect additional orders from the same customer; in fact, if the company could offer this price in the market generally, she believed that sales of this machine would increase by 50 percent Cleon Skowsen, president of Ferguson, was skeptical about accepting the order. The company had a policy not to accept any order that did not provide revenues at least equal to its full manufacturing cost plus 15 percent. The price offered was $2,100 per unit. However, before a final decision was made, Cleon decided to request information on the estimated cost per unit He was concerned because the company was experiencing increased competition, and the number of new orders was dropping The costs of producing the specialized machine are as follows: Direct materials Direct labour Overhead Total Units Unit cost $ 24,000 20,000 37,000 * $ 81,000 40 * Overhead is currently allocated based on an expected volume of 400,000 direct labour ours The controller's office had recently researched the possibility of using activity-based multiple overhead rates instead of the single rate currently in use. The controller had promised more accurate product costing, and Cleon was curious about how this approach would affect the pricing of this particular machine. Within 24 hours, the controller had assembled the following data regarding overhead Overhead cost pools Costs Depreciation, equipment Power (machine usage) Material handling Rework costs Scrap costs Depreciation, buulding Supervision (plant-wide) Other plant-wide overhead $ 300,000 500,000 800,000 300,000 640,000 500,000 200,000 460,000 460,00 Total $ 3.700,000 Expected activity for selected cost drivers for the year are: Machine hours Kilowatt hours Material moves Units reworked Units scrapped Direct labour hours 100,000 100,000 10,000 2,000 1,000 400,000 The overhead rate for facility-level activities is based on direct labour hours Estimated data for the potential job, based on production of 40 units, are Direct materials Direct labour (4,000 hours) Number of machine hours Number of kilowatt hours Number of material moves Number of units reworked Number of units scrapped $ 24,000 $ 20,000 1,000 6 3 Required Given the current allocation and normal operating conditions, would Ferguson Equipment accept the job? Support your answer with calculations. 1. Prepare a schedule calculating the unit cost of the specialized machine using activity based costing. 2. Based on the ABC results, what course of action would you recommend for Ferguson Equipment regarding this order? Support your answer. 3. Which method of overhead allocation would you recommend Ferguson use? Why? Give both pros and cons for vour recommendation 4.Explanation / Answer
Working Notes;
1. Material Handling Rate = $ 200,000/1000 = $ 200
2. Quality Inspection Rate = $ 600,000/5000= 120
3. Overhead Based on Machine hours = (Material handling cost + Quality inspection cost )/Machine hours
= 200,000 + 600,000 / 80,000 = 800,000/80,000 = 10
1. Cost of Potential Job using Machine hurs :
Direct Materials $ 3,700
Direct Labour 7,000
Overhead (200,000+600,000)/80,000 = 10 x 900= 9,000