Required:
Recompute the predetermined overhead rate assuming that the new machine will be installed. Explain why the new predetermined overhead rate is higher (or lower) than the rate that was originally estimated for the year 2016.
What effect (if any) would this new rate have on the cost of jobs that do not use the new automated milling machine?
Why would mangers be concerned about the new overhead rate?
After seeing the new predetermined overhead rate, the production manager admitted that he probably wouldn't be able to eliminate all of the 6,000 direct labor-hours. He had been hoping to accomplish the reduction by not replacing workers who retire or quit, but that would not be possible. As a result, the real labor savings would be only about 2,000 hours - one worker. Given this additional information, evaluate the original decision to acquire the automated milling machine from Central Robotics.