product profitability 415048

Rice Inc. manufactures lawn mowers and garden tractors. Lawn mowers are relatively simple to produce and are made in large quantities. Garden tractors are customized to individual wholesale customer specifications. The company sells 300,000 lawn mowers and 30,000 garden tractors annually. Revenues and costs incurred for each product are as follows:

Law Mower Garden Tractors Rev $19,500,000 $17,850,000 DM 4,000,000 2,700,000 DL ($20/Hr) 2,800,000 6,000,000 Overhead ? ?

Manufacturing overhead totals $3,960,000, and administrative expenses equal $7,400,000.

a. Calculate the profit (loss) in total and per unit for each product if overhead is assigned to product using a per unit basis.

b. Calculate the profit (loss) in total and per unit for each product if overhead is assigned to products using a direct labor hour basis.

c. Assume that manufacturing overhead can be divided into two cost pools as follows: $1,320,000, which has a cost driver of direct labor hours, and $2,640,000, which has a cost driver of machine hours (totaling 150,000). Lawn mower production uses 25,000 machine hours; garden tractor production uses 125,000 machine hours. Calculate the profit (loss) in total and per unit for each product if overhead is assigned to products using these two overhead bases.

d. Does your answer in (a), (b), or (c) provide the best representation of the profit contributed by each product?Explain.