Calculate the total overhead to be allocated

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Reference no: EM13340532

Theory of Constraints

AB Manufacturing Co. Ltd produces two products, A and B.  Both products require machining, and assembly and packaging.  Total material cost and labour and machining requirements per unit are as follows:

 

 

Product A

Product B

Direct material

Direct labour

Machining time

$3.00

15 min

60 min

$3.00

30 min

30 min

 

Last year's costs for the production of 20 000 units of A and 40 000 units of B were as follows:

 

Direct material

$180 000

Direct labour

$250 000

Overhead

$280 000

Total costs

$710 000

 

Overhead costs were all fixed costs. The following data were derived in respect of overhead costs.

 

Overhead

 

Activity

Overhead

 

Cost

Cost

 

Driver

Cost   Consumption

Driver

Product A

Product B

Machining

Setups Receiving Packing

$140 000

45 000

35 000

60 000

Machine hours

Number Setups Number Receipts Number Orders

20 000

100

300

800

20 000

50

200

400

$280 000

 

Overhead costs and output are expected to be the same this year as last year. This year maximum sales will be 20 000 units of A and 40 000 units of B.

Required:

(a)  Assuming that each activity's cost pool is allocated using a separate cost driver as indicated above, calculate the total overhead to be allocated to one unit of each product.

(b)  Assume that this coming year machining will be a bottleneck resource with only 30 000 hours per annum available.  Both products sell for $15 per unit.  Based on the TOC philosophy, determine the appropriate product mix for this year which will maximise annual profits.

Reference no: EM13340532

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