Q21E_3 - Horngren'S Financial And Managerial Accounting

Question

Refer to Exercise E19-20. For 2019, Eason’s managers have decided to use the same indirect manufacturing costs per wheel rim that they computed in 2018 using activitybasedn costing. In addition to the unit indirect manufacturing costs, the following data are expected for the company’s standard and deluxe models for 2019:

                                                      Standard                     Deluxe

Sales price                                    \( 800.00                    \) 940.00

Direct materials                                 31.00                         48.00

Direct labor                                        45.00                         52.00

 

Because of limited machine hour capacity, Eason can produce either 2,000 standard rims or 2,000 deluxe rims.

 

Requirements

3. Which course of action will yield more income for Eason?

Step-by-Step Solution

Answer

Eason should prefer the single plant-wide allocation method for yielding the highest income.

Step-by-Step-Solution Step 1: Comparison of gross profit under both the methods

Gross Profit	Using Activity-based costing	Using single base overhead costing
Standard Model	62.5%	71%
Deluxe Model	13%	69.5%

Step 2: Course of action for Eason

As given Eason can produce only 2000 units of either standard model or deluxe model. The gross profit computed in both cases yields the highest profit for the standard model in both cases.  But the gross profit for the deluxe model is highest under the single plant-wide allocation method. 

Furthermore, the gross profit is almost similar for both models under the single plant-wide allocation method.

So, the preferred course of action for Eason for producing the highest income would be to choose the single plant-wide allocation method accounting.