Ouch Is that Deluxe model ever a loser I say the time has co

\"Ouch! Is that Deluxe model ever a loser! I say the time has come to cut back its production and shift our resources toward the new Finest model!\" said Rachell Warner, executive vice-president of Wedgewood Acres Ltd. \"Just look at this statement I\'ve received from accounting. The Finest is generating more margin and significantly more profit than the Deluxe, and it has only about 40% as much in sales. I am convinced that our future depends on the Finest.\" The year-end statement to which Rachell was referring follows: Wedgewood Acres Ltd. Income Statement Product Model Finest $ 3,000,000 1740,000 1,260,000 Total Deluxe $10,200,000 7,200,000 Sales .. Cost of goods sold Gross margin.. Less selling and administrative expenses Operating income(loss).... 7860,000 6,120,000 1,080,000 2,004,000 S 336,000 1494,000 $(414 000) $-750.000 Number of units produced and sold Net income (loss) per unit 36,000 $(11.50) 12,000 $62.50 The numbers sure look that way,\" replied Con Artist, the company\'s sales manager. \"But why isn\'t the competition more excited about the Finest? I know we\'ve only been producing the model for three years, but I\'m surprised that more of our competitors haven\'t recognized what a cash cow it is.\" \"I think it\'s our new automated plant,\" replied Rachel. \"Now it takes two direct-labour hours to produce a unit of the Deluxe and one direct-labour hour to produce a unit of the Finest. That\'s considerably less than it used to take us, especially for the Finest.

Solution

Wedgewood Acres Limited Income Statement ($) Product Model Total Deluxe Finest Sales 10200000 7200000 3000000 Cost of goods sold 7860000 6120000 1740000 Gross Margin 2340000 1080000 1260000 Selling & Administrative Exp 2004000 1494000 510000 Operating Income (loss) 336000 (414000) 750000 Number of units produced and sold 36000 12000 Net Income/(Loss) per unit (11.50) 62.50 Prime costs per unit produced Direct materials 60 90 Direct labour 24 12 Selling and Administrative Exp Head Office administration 1800000 Commissions 204000 Total 2004000 Net Income/(loss) per unit Re-stated Income Statement Product Model Total Deluxe Finest Sales 10200000 7200000 3000000 Cost of goods sold Prime Costs: Direct Materials 60 90 2160000 1080000 Direct Labour 24 12 864000 144000 1008000 Prime Costs: 3024000 1224000 Gross Margin 5952000 4176000 1776000 Selling and administrative Exp Head Office Administration 1800000 Commissions 144000 60000 Contribution Margin 5748000 4032000 1716000 Manufacturing overhead 3612000 Head Office Administration 1800000 Net Income 336000 2 Pre-determined Overhead Rate that the company used: Manufacturing Overheads 3612000 Direct Labour hours 24 36000 864000 12 12000 144000 Total labour hours 1008000 Overhead Rate 3.58 per direct labour hour 3 Prime Cost Deluxe Finest 3024000 1224000 Overheads @ 3.58 per direct labour hour 3093120 515520 Total cost 6117120 1739520 4 Activity based cost system Schedule that computes and presents the amount and rate for each of the six cost pools Activity for the year Activity for each model Total Deluxe Finest Indirect labour Indirect materials Equipment Deprec Supervisory Salary QC Inspector salaries Production planning 1200 800 400 80% 15% Moving product 2400 1680 720 30% Machine set up 3200 2000 1200 70% 25% Machine operation 140000 60000 80000 100% Soldering 400000 120000 280000 75% Quality control 18000 8000 10000 20% 85%