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 $12 per labor hour ($2,400,000 overhead /200,000 labor hours). In the correct year, overhead increased by $800,000 due to acquisition of equipment. Labor, however, decrease by 40,000 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 to make an order of jewelry pieces is typically less than 10 labor hours. On such jobs (less than 10 labor hours). The new equipment is not used, and thus the jobs are relatively labor intensive.

Required

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 10-labor-hour job requested by Jasmine's Fine Jewelry? How does the 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.

Overhead cost in current year = $ 3,200,000

Labour hours = 1,60,000

Overhead cost of one hour labour =3,200,000/1,60,000 =$ 20

Overhead cost of a 10 hour labour =$200

No small jobs will not be less profitable than they were in the past because the installation of equipment added to overhead cost for big jobs and since the machine will also bring down the number of labour hours required to perform a job,the overhead cost per unit will increase for jobs requiring the use of equipment.Hence,small jobs will not prove less profitable.

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