Kima Company manufactures and sells two models of a home appliance. The Standard

Question

Kima Company manufactures and sells two models of a home appliance. The Standard model is a basic appliance with mostly manual features, while the Galaxy model is highly automated. The appliances are produced to order, and there are no inventories at the end of the year The cost accounting system at Kima allocates overhead to products based on direct labor cost. Overhead in year 1, which just ended, was $3,124,750. Other data for year 1 for the two products follow Standard Model (20,000 units) $6,050,000 2,450,000 1,650,000 Galaxy Model Sales revenue Direct materials Direct labor (3,000 units) $2,750,000 350,000 505,000 Required a. Compute product line profits/loss for the Standard model and the Galaxy model for year 1. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) Galaxy b. A study of overhead shows that without the Standard model, overhead would fall to $2,275,000. Assume all other revenues and costs would remain the same for the Galaxy model in year 2. Compute product line profits/loss for the Galaxy model in year 2 assuming the Standard model was not produced or sold. (Negative amounts should be indicated by a minus sign.)

Explanation / Answer

a) calculation of profit/loss: Particulars Standard Galaxy Sales 6050000 2750000 Less: Direct materials 2450000 350000 Less: Direct Labor 1650000 505000 Less: Overhead (Working note) 2392500 732250 Profit (Sales-direct material- direct labor- overhead) -442500 1162750 So there is loss of $442500 in case of standard product There is profit of $1162750 in case of galaxy product Working: Calculation of overhead: Total direct labor cost= 1650000+505000= 2155000 Overhead cost of Standard= 3124750*1650000/2155000= 2392500 Overhead cost of Galaxy= 3124750*505000/2155000= 732250 b) calculation of profit/loss: Particulars Galaxy Sales 2750000 Less: Direct materials 350000 Less: Direct Labor 505000 Less: Overhead 2275000 Profit (Sales-direct material- direct labor- overhead) -380000 Loss of galaxy model in year 2 is $380000

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