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MA17-44: Evaluate the profitability of Dart's two products

I need to evaluate the profitability of Dart's two products and make any appropriate recommendations. I am not sure where to start on trying to figure this out.

When Dart Products started operation five years ago, its only produt was a radar detector known as the Bear Detector. The production system was simple, with Bear Detectors manually assembled from purchased components. With no ending work-in-process inventories, unit costs were calculated once a month by dividing current manufacturing costs by units produced.

Last year, Dart Products began to m manufacture a second product, code-named the Lion Tamer. The production of Lion Tamers involves both machine-intensive fabrication and manual assembly. THe introduction of the second product necessitated a change in the firm's simple accounting system. Dart products now separately assigns direct material and direct labor costs to each product using information contained on materials requisitions and work tickets. Manufacturing overhead is accumulated in a single cost pool and assigned on the basis of direct labor hours, which is common to both products.

Following are the last year's financial results by product:

Bear Detector Lion Tamer
Sales
Units....................................................5,000 .........................2,000
Dollars................................................$500,000 ........................$300,000
Cost of goods sold
Direct materials........$110,000 ............................$65,000
Direct labor................$150,000 ............................$45,000
Applied overhead......$270,000 ............................$81,000
Total..................................................(530,000) .......................(191,000)
Gross profit........................................($30,000) .......................$109,000

Management is concerned about the mixed nature of last year's financial performance. It appears that the Lion Tamer is a roaring success. the only competition, the Nittney Company, has been selling a competing product for considerably more than Dart's Lion Tamer; this company is in financial difficulty and is likely to file for bankruptcy. The management of Dart Products attributes the Lion Tamer's success to excellent production management. Management is concerned, however, about the gurture of the Bear Detector and is likely to discontinue that product unless its profitability can be improved. you have been asked to help with this decision and have obtained the following information:

* The labor rate is $15 per hour.
* Dart has two separate production operations, fabrication and assembly. Bear Detectors undergo only assembly operations and require 2.0 assembly hours per unit. Lion Tamers undergo both fabrication and assembly and require 1.0 fabrication hour and 0.5 assembly hour per unit.

* The annual Fabricating Department overhead cost function is:
$200,000 + $5 (labor hours)

* The annual Assembly Department overhead cost function is:
$20,000 + $11 (labor hours)

Evaluate the profitability of Dart's two products and make any recommendations you believe appropriate.

Solution Preview

See the tutorial attached in Excel. Click in cells to see computations.

If you assigned the fabricating and assembly based on who is using the hours, you get a completely different profitability picture -- see second report shown in Excel.

I assigned all of the ...

Solution Summary

See the tutorial attached in Excel. Click in cells to see computations. Your tutorial shows you a new profitability report that assigns overhead based on the overhead resources consumed. This shows a dramatically different profit picture. A few comments are made about why this is a better view of the product's true profits.

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