Compass Metal Bearings Produces Two Sizes of Metal Bearings (Sold

question 15

Essay

Compass Metal Bearings produces two sizes of metal bearings (sold by the crate)-standard and heavy.The standard bearings require $200 of direct materials per unit (per crate),and the heavy bearings require $245 of direct materials per unit.The operation is mechanized,and there is no direct labor.Previously Compass used a single plantwide allocation rate for manufacturing overhead,which was $1.55 per machine hour.Based on the single rate,gross profit was as follows:
$\begin{array}{lll}\textbf { Per unit } & \textbf { Standard } & \textbf { Heavy } \\\text { Direct materials cost } & \$ 200.00 & \$ 245.0 \\\text { Manufacturing overhead cost } & \underline{124.00} & \underline{93.00} \\\text { Total manufacturing cost } & \$ 324.00 & \$ 338.0\end{array}$ $\begin{array}{lll}\text { Sales price per unit } & \underline{350.00} & \underline{370.00} \\\text { Gross profit per unit } & \$ 26.00 & \$ 32.00\end{array}$ Although the data showed that the heavy bearings were more profitable than the standard bearings,the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings,and that this factor was not adequately reflected in the single plantwide allocation rate.He suspected that it was distorting the profit data.He suggested adopting an activity-based costing approach.
Working together,the engineers and accountants identified the following three manufacturing activities and broke down the annual overhead costs as shown below:
$\begin{array}{ll}\text { Activities: } &{\text { Estimated Cost }} \\\text { Metal fabrication } & \$ 420,000 \\\text { Machine processing } & 152,000 \\\text { Packaging } & \underline{17,000} \\\text { Total overhead cost } & \$ 589,000\end{array}$ Engineers believed that metal fabrication costs should be allocated by weight and estimated that the plant processed 12,000 kilos of metal per year.Machine processing costs were correlated to machine hours,and the engineers estimated a total of 380,000 machine hours for the year.Packaging costs were the same for both types of products,and so they could be allocated simply by the number of units produced.The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year.Additional data on a per unit basis were as given below:
$\begin{array}{lll} &{\text { Standard }} & \text { Heavy } \\\text { Kilos per unit } & 2.00 & 4.00 \\\text { Machine hours per unit } & 80.00 & 60.00\end{array}$ Using the data above,calculate the predetermined overhead allocation rates using activity-based costing.Then,following the activity-based costing methodology,calculate the production cost and gross profit for one unit of standard bearings.(Round your intermediate calculations to two decimal places.)

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Definitions:

Risk-Free Asset

An investment guaranteed to return the original investment without any loss, typically associated with high-grade government securities.

Indifference Curve

In economics, a curve that represents different combinations of goods or services among which a consumer is indifferent, showing preferences.

Risk-Free Asset

An investment that is expected to deliver its returns without any risk of financial loss, traditionally government bonds are considered close to risk-free.

Utility

The measure of the welfare or satisfaction of an investor.