Please show your work, thank you. Ferguson Equipment, Inc. manufactures custom-d
ID: 2423381 • Letter: P
Question
Please show your work, 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 han 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 percen Cleon n, president of Ferguson, was skeptical about accepting the order. The company had a policy not to accept any order that did not provide revenues a east 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 un 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 24,000 Direct labour 20,000 Overhead 37,000 81,000 Tota Units 40 Unit cost Overhead is currently allocated based on an expected volume of 400,000 direct labour hours 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 300,000 Power (machine usage) 500,000 Material handling 800,000 Rework costs 300,000 Scrap costs 640,000 Depreciation, building 500,000 Supervision (plant-wide) 200,000 460,000 Other plant-wide overhead Total 3,700,000 Expected activity for selected cost drivers for the year are Machine hours 100,000 Kilowatt hours 100,000 Material moves 10,000 Units reworked 2.000 Units scrapped 1,000 Direct labour hours 400,000 The overhead rate for facility-level activities is based on direct labour hours Estimated data for the potential job, based on production o 40 units, are Direct materials 24,000 Direct labour (4,000 hours 20,000 Number of machine hours 1.000 Number of kilowatt hours 1,000 Number of material moves Number of units reworked Number of units scrapped Required 1. Given the current allocation and normal operating conditions, would Ferguson Equipmen accept the job? Support your answer w calculations. 2. Prepare a schedule calculating the unit cost of the specialized machine using activity. based costing 3. Based on the ABC results, what course of action would you recommend for Ferguson Equipment regarding this order? Support your answer 4. Which method of overhead allocation would you recommend Ferguson use? Why? Give both pros and cons for your recommendationExplanation / Answer
1)
2.
Note: building cost, and supervision and othe general overheads are not consided , bacause even in the absence of this order these costs tend to incure.
3. as the cost per unit is 1367.5 and the offered price is 2100, the order must be accepted , because it will generate additiional contribution of (2100-1367.5 ) * 40 = $29300
4. ferguson must use Activity based costing , because it gives the correct cost of production, and the cost are allocated to the products according to usage of different services, the cons of this method is difficult to recognise the correct cost drivers and requires lot of work
calculation of cost per driver activity depreciation power material handling reworks scrap costs amount $ a 300000 500000 800000 300000 640000 number of activites b 100000 100000 10000 2000 1000 cost per activity (a/b) 3 5 80 150 640 computation of cost according to ABC $ direct material 24000 direct labour 20000 depreciation (3*1000) 3000 power (5*1000) 5000 material handling(80*6) 480 reworks(150*2) 300 scrap costs(640*3) 1920 total cost for 40 units 54700 cost per unit (54700/40) 1367.5