Discuss whether the company should continue to manufacture b…
Potter Inc. manufactures wizard figurines. All figurines are approximately the same size, but some are plain ceramic whereas others are “fancy,” with purple leather capes and a prism-headed wand. Management is considering producing only the fancy figurines because they appear to be substantially more profitable than the ceramic figurines. The company’s total production overhead is $5,017,500. Some additional data follow.
Ceramic
Fancy
Revenues
$15,000,000
$16,800,000
Direct costs
$8,250,000
$8,750,000
Production (units)
1,500,000
350,000
Machine hours
200,000
50, 000
Direct labor hours
34,500
153,625
Number of inspections
1,000
6,500
Required:
a. Potter Inc. has consistently used machine hours to allocate overhead. Determine the profitability of each line of figurines, and decide whether the company should stop producing the ceramic figurines.
b. The cost accountant has determined that production overhead costs can be assigned to separate cost pools. Pool #1 contains $1,260,000 of overhead costs for which the most appropriate cost driver is machine hours; Pool #2 contains $2,257,500 of overhead costs for which the most appropriate cost driver is direct labor hours; and Pool #3 contains $1,500,000 of overhead costs for which the most appropriate cost driver is number of inspections. Compute the overhead cost that should be allocated to each type of figurine using this methodology.
c. Discuss whether the company should continue to manufacture both types of figurines.
