Question

Isaac Engines Inc. produces three products-pistons, valves, and cams-for the heavy equipment industry. Isaac Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows: Budgeted Volume (Units) Direct Labor Hours Per Unit Price Per Unit Direct Materials Per Unit 1727 Pistons 6,000 0.30 $40 21 Valves 13,000 0.50 Cams 1,000 0.10 The estimated direct labor rate is $20 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Isaac Engines is $235,200.

Answer 1

Ans.

	Budgeted Volume(Units)	Direct Lab Hours per unit	Price per Unit	Direct Mat per Unit	Direct Labor hours expected	Revenues
Pistons	6000	0.3	$40	$9	1800	$240,000
Valves	13000	0.5	21	5	6500	$273,000
Cams	1000	0.1	55	20	100	$55,000
TOTAL					8400

a)

Plant wide factory overheadrate = Estimated Fixed Overhead / Expected Direct Labor Hours

Plant wide factory overheadrate = $ 235,200 / 8,400 hours = $28 per DLH

b)

	Direct Labor hours per unit	Factory overhead cost per unit	Direct Labor Cost per unit
Pistons	0.3 dlh	$                 9.33333	$                6.6667
Valves	0.5 dlh	$               15.5556	$              11.1111
Cams	0.1 dlh	$                 3.11111	$                2.2222

c)

	Pistons	Valves	Cams
Revenues	$        240,000.00	$    273,000.00	$      55,000.00
Less:Product Costs:
Direct Materials	$          54,000.00	$      65,000.00	$      20,000.00
Direct Labor	$          40,000.00	$    144,444.44	$        2,222.22
Fact. Overhead	$          56,000.00	$    202,222.22	$        3,111.11
Total Product costs	$        150,000.00	$    411,666.67	$      25,333.33
Gross Profit	$          90,000.00	$ (138,666.67)	$      29,666.67
Gross profit percentage of sales	37.50%	-50.79%	53.94%

d)

Valves have the lowest gross profit as a percent of sales, Valves may require a higher price or lower cost to manufacture in order to achieve the same profitability as the other two products.