Diamonds, Etc. manufactures jewelry settings and sells them to retail stores. In

Question

Diamonds, Etc. manufactures jewelry settings and sells them to retail stores. In the past, most settings were made by hand, and the overhead allocation rate in the prior year was $10 per labor hour ($2,000,000 overhead / 200,000 labor hours). In the current year, overhead increased by $400,000 due to acquisition of equipment. Labor, however, decreased by 50,000 hours because the equipment allows rapid creation of the settings. One of the company’s many customers is a local jewelry store, Jasmine’s Fine Jewelry. This store is relatively small and the time to make an order of jewelry pieces is typically less than 8 labor hours. On such jobs (less than 8 labor hours), the new equipment is not used, and thus the jobs are relatively labor intensive.

a.Assume that in the current year, the company continues to allocate overhead based on labor hours. What would be the overhead cost of an 8-labor-hour requested by Jasmine’s Fine Jewelry? How does this compare to the overhead cost charged to such a job in the prior year?


b.Assume that the price charged for small jobs does not change in the current year. Are small jobs less profitable than they were in the past?

Explanation / Answer

a. Cost 2000000 Add: Increase 400000 Total Cost 2400000 Labour Hours in prior year 200000 Less: Decreased hours 50000 Total Labor hours 150000 Cost per Labor Hour = Total Cost / Total Labor hours = 2400000 / 150000 = $16 Prior cost per labour hour = $10 Increased labour hour cost = $6 b. Example: Past Present Cost 10 16 Selling price 18 18 Income 8 2 If price does not changed, current year profits will decrease than past. Thank you.... Cost 2000000 Add: Increase 400000 Total Cost 2400000 Labour Hours in prior year 200000 Less: Decreased hours 50000 Total Labor hours 150000 Cost per Labor Hour = Total Cost / Total Labor hours = 2400000 / 150000 = $16 Prior cost per labour hour = $10 Increased labour hour cost = $6

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