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Allocated Cost and Opportunity Cost Binder Manu...

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Allocated Cost and Opportunity Cost Binder Manufacturing produces small electric motors used by appliance manufacturers. In the past year, the company has experienced severe excess capacity due to competition from a foreign company that has entered Binder's market. The company is currently bidding on a potential order from Dacon Appliances for 6,000 Model 350 motors. The estimated cost of each motor is $40, as follows: Direct material $20 Direct labor 5 Overhead 15 Total $40 The predetermined overhead rate is $3 per direct labor dollar. This was estimated by dividing estimated annual overhead ($15,000,000) by estimated annual direct labor ($5,000,000). The $15,000,000 of overhead is composed of $6,000,000 of variable costs and $9,000,000 of fixed costs. The largest fixed cost relates to depreciation of plant and equipment. Required a. With respect to overhead, what is the opportunity cost of producing a Model 350 motor? b. Suppose Binder can win the Dacon business by bidding a price of $37 per motor (but no higher price will result in a winning bid). Should Binder bid $37? c. Discuss how an allocation of overhead based on opportunity cost would facilitate an appropriate bidding decision.,Cost Allocation and Apparent Profitability 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 current year, overhead increased by $800,000 due to acquisition of equipment. Labor, however, decreased 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 the time 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 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?

 

Paper#4628 | Written in 18-Jul-2015

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