Reference no: EM132778416

Mister Geppetto Mister Geppetto is a Chicago based firm that produces and sales customized classic and traditional wooden toys. Mister Geppetto received two special orders to be produced and delivered during January 2020:

1. 2500 wooden toy trucks at a price of $40 per truck
2. 1500 wooden toy tractors at a price of $65 per tractor
3. The cost of producing of a single wooden truck is $10: production requires direct labor ($5) and raw materials ($5).
4. The cost of producing of a single toy tractor is $15: production requires direct labor ($10) and raw materials ($5).
5. The firm has additional costs for utilities, packaging, distribution, and billing. These costs include labor and material that are estimated at $20,500 per month.
6. In order to support the firm's growth, the firm recently increased its production and storage space, and in 2020 the firm's monthly rent is $35,500.
7. Mister Geppetto allocates overhead costs evenly across all units produced, and it has no additional orders for the month.

Pinocchio (a good friend of Mister Geppetto), thinks that overhead costs should be allocated based on direct labor hours. It takes 1 direct labor hour to produce a single wooden truck, and 2 direct labor hours to produce a single wooden tractor.

Problem a. Using direct labor hours to allocate overhead costs, what is the total cost of manufacturing the toy trucks? The toy tractors?

Problem b. Using direct labor hours to allocate overhead costs, what is the income from each order?

Problem c. Which allocation base would you advise Mister Geppetto to use? Why?