Printing Press (PP) Is Operating Close to Capacity

question 14

Multiple Choice

Printing Press (PP) is operating close to capacity. The sales department earns commissions of 8% on sales. Setup charges amount to $60 per item, plus variable costs of $1 per copy. When capacity is reached, PP can still meet the order, but incurs overtime charges and other variable overhead of 25 cents per copy. The production manager complains that the sales staff promise delivery within very tight deadlines in order to secure orders, which means that overtime and other variable overhead has to be paid. A recent rush order for 100 engraved wedding invitations was secured at the normal price of $200. Which is true?

• A)The present arrangements maximize profits for PP
• B)Sales staff would coordinate rush orders with production if the excess charges were to be charged against their sales commission
• C)Sales will increase if sales commission arrangements are changed
• D)Sales staff are not rewarded for maximizing sales at any cost
• E)None of the above

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Definitions:

Direct Labor Hours

The total hours worked directly on the production of goods or services, used in calculating the labor cost of products.

Allocation Base

A measure or statistics used to determine how to distribute indirect costs to various cost objects in a way that is equitable and rational.

Overhead Costs

Indirect expenses related to the general operation of a business, such as administrative salaries, rent, and utilities, that cannot be directly attributed to a specific product or service.

Plantwide Overhead Rate

A single overhead rate calculated for an entire manufacturing plant, used to allocate overhead costs to multiple production departments or products.