Problem:
Potter Inc. manufactures wizard figurines. All figurines are approximately the same size, but some are plain ceramic whereas others are "fancy," with purple leather capes and a prism-headed wand. Management is considering producing only the fancy figurines because they appear to be substantially more profitable than the ceramic figurines. The company's total production overhead is $5,017,500. Some additional data follow.
|
Ceramic
|
Fancy
|
|
Revenues
|
$15,000,000
|
$16,800,000
|
|
Direct costs
|
$8,250,000
|
$8,750,000
|
|
Production (units)
|
1,500,000
|
350,000
|
|
Machine hours
|
200,000
|
50, 000
|
|
Direct labor hours
|
34,500
|
153,625
|
|
Number of inspections
|
1,000
|
6,500
|
Required:
a. Potter Inc. has consistently used machine hours to allocate overhead. Determine the profitability of each line of figurines, and decide whether the company should stop producing the ceramic figurines.
b. The cost accountant has determined that production overhead costs can be assigned to separate cost pools. Pool #1 contains $1,260,000 of overhead costs for which the most appropriate cost driver is machine hours; Pool #2 contains $2,257,500 of overhead costs for which the most appropriate cost driver is direct labor hours; and Pool #3 contains $1,500,000 of overhead costs for which the most appropriate cost driver is number of inspections. Compute the overhead cost that should be allocated to each type of figurine using this methodology.
c. Discuss whether the company should continue to manufacture both types of figurines.