Reference no: EM13834904
Holly Manufacturing Case
Holly Manufacturing Company produces two cello models. One is a standard acoustic cello that sells for $600 and is constructed from medium-grade materials. The other model is a custom-made amplified cello with pearl inlays and a body constructed from special woods.
The custom cello sells for $900. Both cellos require 10 hours of direct labor to produce, but the custom cello is manufactured by more experienced workers who are paid at a higher rate.
Most of Holly's sales come from the standard cello, but sales of the custom model have been growing. Following is the company's sales, production, and cost information for last year:
|
Cello
|
|
Standard
|
Custom
|
|
Sales and production volume in units
|
900
|
100
|
|
Unit Selling Price
|
|
$600.00
|
$900.00
|
|
Unit costs:
|
|
|
|
|
Direct materials
|
|
$150.00
|
$375.00
|
|
Direct labor
|
|
$180.00
|
$240.00
|
|
Manufacturing overhead*
|
|
$135.00
|
$135.00
|
|
Total unit costs
|
|
$465.00
|
$750.00
|
|
Unit Gross Profit
|
|
$135.00
|
$150.00
|
|
|
|
|
|
Direct Labor Hours
|
|
10.00
|
10.00
|
|
Direct Labor Rate Per Hour
|
$18.00
|
$24.00
|
|
*Manufacturing overhead costs:
|
|
|
Building depreciation
|
$ 40,000
|
|
|
Maintenance
|
15,000.00
|
|
|
Purchasing
|
20,000.00
|
|
|
Inspection
|
12,000.00
|
|
|
Indirect materials
|
15,000.00
|
|
|
Supervision
|
30,000.00
|
|
|
Supplies
|
3,000.00
|
|
|
Total manufacturing overhead costs
|
$135,000.00
|
These manufacturing overhead costs are fixed in nature: they do not vary with the volume of manufacturing activity. The company allocates overhead costs using the traditional method. Its activity base is direct labor hours. The predetermined overhead rate, based on 10,000 direct labor hours, is $13.50 ($135,000 ÷ 10,000 direct labor hours).
Johann Brahms, president of Holly, is concerned that the traditional cost-allocation system the company is using may not be generating accurate information and that the selling price of the custom cello may not be covering its true cost.
Questions To Be Answered:
1. The cost-allocation system Holly has been using allocates 90% of overhead costs to the standard cello because 90% of direct labor hours were spent on the standard model. How much overhead was allocated to each of the two models last year? Discuss why this might not be an accurate way to assign overhead costs to products.
2. How would the use of more than one cost pool improve Holly's cost allocation? Use the data below for the questions which follow. Holly's controller developed the following data for use in activity-based costing:
|
Manufacturing
|
|
|
Standard
|
Custom
|
|
Overhead Cost
|
Amount
|
Cost Driver
|
Cello
|
Cello
|
|
Building depreciation
|
$40,000
|
Square footage
|
3,000
|
1,000
|
|
Maintenance
|
$15,000
|
Direct labor hours
|
9,000
|
1,000
|
|
Purchasing
|
$20,000
|
# of purchase orders
|
1,500
|
500
|
|
Inspection
|
$12,000
|
# of inspections
|
400
|
600
|
|
Indirect materials
|
$15,000
|
# of units manufactured
|
900
|
100
|
|
Supervision
|
$30,000
|
# of inspections
|
400
|
600
|
|
Supplies
|
$3,000
|
# of units manufactured
|
900
|
100
|
|
Total
|
$135,000
|
|
|
|
3. Use activity-based costing to allocate the costs of overhead per unit and in total to each model of cello.
4. Calculate the cost of a custom cello using activity-based costing.
5. Why is the cost different from the cost calculated using the traditional allocation method?
6. At the current selling price, is the company covering its true cost of production? Briefly discuss
7. What should Holly Manufacturing do about the situation?
8. What should Holly Manufacturing do if the quantity of custom cellos sold at the new price falls to 50 per year?
9. What should Holly Manufacturing do about the situation if the price of the custom cello cannot exceed $900?
10. At a selling price of $1,000 each, what is the breakeven unit volume for the custom cello?
11. What are the lessons learned from this case?
|
What is the minimum size of sequence number in bits
: Suppose that a window size in Selective and Repeat is 4, what is the minimum size of sequence number in bits required to have no problems at receiver.
|
|
Improve the security and confidentiality of patient health
: he benefits of using information technology are plentiful. For example, the promise of fully realized electronic medical records is having a single record that includes all of a patient's health information: a record that is up to date, complete, ..
|
|
Pseudocode description of a function that uses only d and q
: Suppose you have a deque D containing the numbers (1,2,3,4,5,6,7,8), in this order. Suppose further that you have an initially empty queue Q. Give a pseudo-code description of a function that uses only D and Q (and no other variables or objects) and ..
|
|
How different empires developed in two world culture areas
: analyze how two different empires developed in two world culture areas in the premodern world (between the Bronze Age to 1600 CE).
|
|
Holly manufacturing case
: Holly Manufacturing Company produces two cello models. One is a standard acoustic cello that sells for $600 and is constructed from medium-grade materials. The other model is a custom-made amplified cello with pearl inlays and a body constr..
|
|
How would you determine ph of vinegar using cabbage juice
: How would you determine the PH of vinegar using cabbage juice as an indicator
|
|
Joint stock companies motivate nations to engage exploration
: What motivated each group to explore and colonize the New World? How were their motivations similar, how were they different? How did Mercantilism and Joint Stock companies motivate these nations to engage in exploration
|
|
What is the dollar npv of the german project
: What is the dollar NPV of the German project? What is the dollar NPV of the Swiss project? Should the company go ahead with the German project, the Swiss project, or neither?
|
|
Which of following statements reveals luis experimental bias
: following statements reveals Luis experimental bias
|