nomework. Module 2: Assignment #2-Chapter 4 Score: 0 of 1 pt E4-24 (similar to)

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nomework. Module 2: Assignment #2-Chapter 4 Score: 0 of 1 pt E4-24 (similar to) Save 1 of 14 (0 complete) Score: 0%, 0 of 14 pt Question Help Falcon Flange Com any manufacture a variety of special fianges for numerous customers. Annual capacity-related manufacturing overhead costs are S4 000 000 and the practical capacity level of machine hours is 180.000. The company uses planned machine hours as the cost driver in delermining the plantwide cost driver rate Until last year, the company used approximately 80,000 machine hours per year. Last year, competition increased and demand for the company's fanges fel. In the ace of continuing competition, the company estimates that it will use 2.500 machine hours n the coming year. The company sets its pnees at 140% of p per unit. Requirements (a) What is likely to happen if demand decreases further and Falcon Flange continues to recompute its oost driver rate using the same approach? (b) Advise the company on choosing a cost driver quantity for computing cost driver rates and explain why you advocate your choice of quantity. at a Requirement (a) What is likely to happen if demand decreases further and Falcon Flange consnues to recompute its oost driver rate using the same approach Using the company's approach, the cost driver rate before the decrease in demand was slil per machine hour. With the drop in demand, the cost driver rate wil be s per machine hou Enter your answerin the edit fields and then click Check Answer 2

Explanation / Answer

Part 1)

The cost driver rate can be calculated with the use of following formula:

Cost Driver Rate = Estimated Manufacturing Overheads/Estimated Machine Hours

Using the information provided in the question, we can arrive at the cost driver rate both before (last year) and after the drop in demand (current year) as below:

Cost Driver Rate (Last Year) = 4,000,000/80,000 = $50 per machine hour

Cost Driver Rate (Current Year) = 4,000,000/62,500 = $64 per machine hour

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The completed statement (as required in the question) is provided as below:

Using the company's approach, the cost driver rate before decrease in demand was $50 per machine hour. With the drop in demand, the cost driver rate will be $64 per machine hour.

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Further Consequence:

A further decrease in demand would cause a further increase cost driver rate (with the use of current approach) forcing the company to increase the prices of its products (because of higher costs). However, it is important to note that if the company continues to increase its prices, the demand for its products will reduce further. This would result in a situation of "Downward Spiral".

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Part 2)

The practical capacity quantity of machine hours should be used by the company to calculate the value of cost driver rate. This would help the company in determining the cost of capacity not used and reduce the impact of fluctuations caused by decrease/increase in demand as the cost of resources used would be measured against the practical capacity usage. Underutilized capacity can be used for other purposes which may help in reducing the capacity and overall costs for the company. This could further help the company in keeping the prices of its product at a lower level, thereby, maintaining a constant demand for its products.

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