Holly Manufacturing Case Holly Manufacturing Company produces two cello models.
ID: 2382410 • Letter: H
Question
Holly Manufacturing Case
Holly Manufacturing Company produces two cello models. One is a standard acoustic cello that sells for $600 and is constructed from medium-grade materials. The other model is a custom-made amplified cello with pearl inlays and a body constructed from special woods. The custom cello sells for $900. Both cellos require 10 hours of direct labor to produce, but the custom cello is manufactured by more experienced workers who are paid at a higher rate.
Most of Holly’s sales come from the standard cello, but sales of the custom model have been growing. Following is the company’s sales, production, and cost information for last year:
Cello
Standard
Custom
Sales and production volume in units
900
100
Unit Selling Price
$600.00
$900.00
Unit costs:
Direct materials
$150.00
$375.00
Direct labor
$180.00
$240.00
Manufacturing overhead*
$135.00
$135.00
Total unit costs
$465.00
$750.00
Unit Gross Profit
$135.00
$150.00
Direct Labor Hours
10.00
10.00
Direct Labor Rate Per Hour
$18.00
$24.00
*Manufacturing overhead costs:
Building depreciation
$ 40,000
Maintenance
15,000.00
Purchasing
20,000.00
Inspection
12,000.00
Indirect materials
15,000.00
Supervision
30,000.00
Supplies
3,000.00
Total manufacturing overhead costs
$135,000.00
These manufacturing overhead costs are fixed in nature: they do not vary with the volume of manufacturing activity.
The company allocates overhead costs using the traditional method. Its activity base is direct labor hours. The predetermined overhead rate, based on 10,000 direct labor hours, is $13.50 ($135,000 ÷ 10,000 direct labor hours). Johann Brahms, president of Holly, is concerned that the traditional cost-allocation system the company is using may not be generating accurate information and that the selling price of the custom cello may not be covering its true cost.
1. What should Holly Manufacturing do about this situation?
2. What should Holly Manufacturing do if the quantity of custom cellos sold at the new price falls to 50 per year?
3. What should Holly Manufacturing do about the situation if the price of custom cello cannot exceed $900?
Cello
Standard
Custom
Sales and production volume in units
900
100
Unit Selling Price
$600.00
$900.00
Unit costs:
Direct materials
$150.00
$375.00
Direct labor
$180.00
$240.00
Manufacturing overhead*
$135.00
$135.00
Total unit costs
$465.00
$750.00
Unit Gross Profit
$135.00
$150.00
Direct Labor Hours
10.00
10.00
Direct Labor Rate Per Hour
$18.00
$24.00
Explanation / Answer
Ans 1
Ans 2
Workings
Ans 3
In case company is not in aposition to increase the price beyond 900 , Company can
1. Increase the volume
2, Reduce the cost.
Company can employ activity based costing system where cost drivers can be used to allocate cost collected in cost buckets to products. This will assure that the product are charged with fair share of actual cost , which will in turn enable the company to price the product ,if possible on a cost plus basis , to avoid any oppurtunity loss.Related Questions
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