In what year will the investor recover its investment by way of cash payback? th

Question

In what year will the investor recover its investment by way of cash payback? this a good investment? if yes, why? if No. why? Humphrey Company's Standard labor cost of output is $22 (2 hrs. times $11 per hour). During July, the Company used 2,100 hours of direct labor at an hourly rate of $10.60 per hour in making 1,000 units of finished products. Required: Using the Table Provided, compote the Total, Price, and labor variances. Use FAV to denote favorable variance and UNFAV to denote as unfavorable variance. MNO's Overhead cost is tied to direct labor rate. Every year, the Company makes an estimate of the rate to be applied to direct labor hours used to determine the total overhead. This year, the company incurred actual overhead cost of $116,000 on a total of 2,200 labor hours, if the applied labor rate is $50 per direct labor hour, how much is over or under-applied overhead? Show your computation.

Explanation / Answer

ii. The investor will recover its investment by way of cash payback after a period of 4 years 2 months. Since this is a very huge period for getting back the initial cash outflow of $ 30 million, hence it cannot be considered as a good investment. 4. Budgeted Labor Cost for 1,000 units = 1,000 X 2 X $ 11 = $ 22,000 Actual Labor Cost for 1,000 units = 2,100 hours X $ 10.60 = $ 22,260 Total Labor Variance = Budgeted Labor Cost - Actual Labor Cost = $ 22,000 - $ 22,260 = - $260 UNFAV Labor Rate Variance = (Standard Rate per hour - Actual Rate per hour) X Actual no. of hours worked = ($ 11 - $ 10.60) X 2,100 = $ 840 FAV Labor Efficiency Variance = (Standard Hours required - Actual hours required) X Standard rate per hour = (2,000 - 2,100) X $ 11 = $ 1,100 UNFAV 5. The applied overhead rate per direct labor hour for MNO = $ 50 per hour Thus, for 2,200 labor hours, the overhead cost works out to $ 110,000 The actual overhead cost incurred by MNO for the year is $ 116,000 Hence, the over applied overhead is $ 6,000 ($ 116,000 - $ 110,000).

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