12 Question 3 Belknap Manufacturing has approached you, a CGA, with a problem. T
ID: 2564994 • Letter: 1
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12 Question 3 Belknap Manufacturing has approached you, a CGA, with a problem. The company makes two products: A12 and B15. Demand for B15 has been overwhelming; there is virtually no compctition for this item and several customers have offered to pay up to S48.00 for this product, which Belknap has priced at $27.00 per unit. The prime cost of manufacturc for B15 is $6.26. Fatima, the company president, is puzzled since the demand for B15 has not resulted in increased company profitability. The company's costing system assigns overhead to the products based on direct labour-hours. The following information has been made available to you: Overhead (OH) cost pools and activty levels for 2008: OH Cost Pool Activity Base Batches Material moves Number of orders Engineering hours Machine hours Budget (S) 24,000 90,000 210,000 200,000 162,000 Planned Activity Level Setup Material moves Order processing Engineerin,g Machine maintenance 30 batches 90 moves 140 orders 10,000 hours 18,000 hours Rate (S) 800 1.000 1.500 20 For 2008, the company anticipates a total of 27,440 direct labour-hours will be used. Planned activity fo product B15, which is produced in batches of 1,000 units, are as follows: Activity Planned Activity Level Planned production Material moves Number of orders Engineering hours Machine hours Direct labour-hours 0.000 units 20 moves 50 orders 2,500 hours 6,000 hours 5.000 hours Required Write a brief memo to Fatima explaining why product B15 has not increased Belknap's profitability Provide supporting calculations. Your memo should clearly explain why there is no apparent competition for product B15, why customers are willing to pay almost double the price per unit for this product, and what action (s) you recommend for Fatima. Your memo should be three or four paragraphs and must not exceed 350 words in length. You should perform all of the necessary calculations first and then write your mémo.Explanation / Answer
B15 as per Labour o/h Prime cost 6.26 Total O/H 686000 Total Direct Labour Hours 27440 O/H Rate 25 Direct labour hours for B15 5000 Total o/h assigned 125000 Planned production 1000 O/H rate for B15 125 Total Cost 131.26 B15 as per activity based Prime cost 6.26 O/H Set up cost 800 Material moves 20000 Order processing 75000 Engineering 50000 Machine maintenance 54000 Total O/h Rate 199.8 Total Cost 206.06 B15 has not increased Belknap profitability because of higher Overheads. They need to work upon the Overhead cost to increase profitability. Even if customers agrees to pay the double of current prices they wont be able to sustain. They need to price the product above 206.06 in order to break even. And as the party having monopoly of the product they need to gain the competitive advantage for this.
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