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Category: Business and Industry
Date Submitted: 11/20/2014 08:12 AM
Product 1Product 2
1988199019881990
Expected selling price$62 $62 $54 $54
Standard material cost$16 $16 $27 $27
Standard labor cost$6 $6 $3 $3
Overhead rate434.45%563%434.45%563%
Overhead allocation
(labor cost X overhead rate)$26.07 $33.78$13.03 $16.89 Gross margin$13.93$6.22 $10.97$7.11
Gross margin as % of selling price
(Gross margin/ selling price)22.47%10% 20.31%13.16%
As we can see from the above calculations the Gross Margin as a % of the selling price inexorably going down from 1988 to 1990 for both products 1 and 2. There are significant unavoidable costs, which are increasing the overhead allocation rate and dragging Gross Margin down. Both products are becoming less profitable and hence new candidates for outsourcing. We are witnessing a death spiral.
Also from Exhibit 2:
Overhead by Account Number
1000$7,806 $5,572 $5,679
15006,8245,8835,928
20003,7942,0312,115
30002,5291,3541,410
40008,8887,3607,433
500024,46020,06320,274
80005,9463,7443,744
90006,7715,9485,987
110005,0113,1503,030
1200028,07715,02715,683
140009,7848,0258,110
Total Overhead$109,890 $78,157 $79,393
% change in Overhead from 1988 to 1990-27.75%
Overhead allocation rate as a % of direct labor dollars (Total Overhead/ Total DL)434.45%577.36%563%
% Change in Overhead from 1988 to 1990 = (($79,393 - $109,890)/($109,890)) X 100 = -27.75%
Overhead Allocation Rate as a % of Direct Labor Dollars for each of the three years:
•1988: ($109,890/$25294) X 100 = 434.45%
•1989: ($78,157/$13,537) X 100 = 577.36%
•1990: ($79,393/$14,102) X 100 = 563%
c)From the table in the problem:
Product 1Product 2
1988199019881990
Expected selling price$62 $62 $54 $54
Standard material cost$16 $16 $27 $27
Standard labor cost$6 $6 $3 $3
Overhead rate434.45%563%434.45%563%
Overhead allocation
(labor cost X overhead rate)$26.07 $33.78$13.03 $16.89 Gross margin$13.93$6.22 $10.97$7.11
Gross margin as % of selling price
(Gross margin/ selling...