Calculate the manufacturing overhead rate based

Question

Problem: The New Millenium Manufacturing Company produces two products. One is a millenium surf kit. The other product is a professional surf-board (short board) used in world class surfing competition. Most of the sales come from the millenium surf product, but recently sales of professional boards have been increasing. The following information relates to the products for the most recent fiscal year:

Millenium Surf Kit    Professional Board
Sales (units)                                                  1,500     500
Selling price per unit                                        $980    $650
Direct labor hours required to produce one unit      6       9
Machine hours required to produce one unit           5       8
Direct material costs per unit                            $212    $265
Direct labor costs per unit                                   85     $85

Management is concerned about the current system's effectiveness in allocating overhead and in computing the production costs of the two products. Consequently, Millenium Manufacturing hires a consultant to analyze the overhead costs and assist the company in creating an activity-based costing system. The consultant breaks down the total overhead costs into four categories and measured the activity levels for those same categories as shown below:

Cost Pool
Description    Cost Driver
Millenium Surf Kit
Level of Activity    Professional Board
Level of Activity    Total Costs
Incurred
Equipment    Machine hours              7,500    4,000      $90,000
Material Orders    Number of orders    150       475        33,000
Machine Setups    Number of setups     70        216       30,600
Quality Control    Direct labor hours      5          25        58,000
Total                                                                      $211,600

Required:

Question 1. Calculate the manufacturing overhead rate based on labor hours and machine hours (two separate computations).

Question 2. Determine the cost to manufacturing one unit of each model using two different traditional approaches; direct labor hours and machine hours.

Question 3. Determine the cost to manufacturing one unit of each model using the activity-based costing data presented above.

Question 4. Is the millenium surf kit as profitable as the company may think it is based on its present system?

Question 5. What should Millenium Manufacturing Company do to improve its profitability?