Problem
Southern Cross Telecommunications Ltd manufactures two different fax machines for the business market. Cost estimates for the two models for the current year are as follows:
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Basic System
|
Advanced System
|
|
Direct material
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$400
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$800
|
|
Direct labour (20 hours @ $15 per hour)
|
$300
|
$300
|
|
Manufacturing overhead
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$400
|
$400
|
|
Total
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$1100
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$1500
|
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The predetermined overhead rate is $20 per direct labour hour
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Each model of fax machine requires 20 hours of direct labour. The basic system requires 5 hours in Department A and 15 hours in Department B. The advanced system requires 15 hours in Department A and 5 hours in Department B. The budgeted overhead costs in these two production departments are as follows:
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Department A
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Department B
|
|
Variable Cost
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$16 per direct labour hour
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$4 per direct labour hour
|
|
Fixed Cost
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200 000
|
200 000
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The firm's management expects to operate at a level of 20 000 direct labour hours in each production department during the current year.
Task
I. If the firm prices each model of fax machine at 10 per cent over its cost, what will be the price of each model?