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Kuhn Bicycle Company and Reagan Company

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Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per unit to make the bicycle seats are $5.00 and $6.00, respectively. Normal production is 50,000 bicycles per year.

A supplier offers to make the bicycle seats at a price of $13 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $20,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products.

(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.
(b) Should Kuhn Bicycle Company buy the seats from the outside supplier?

Solution Template:
(a) Net Income
Make Buy Increase(Decrease)
Direct Materials (xx,xxx × $5) $xxx,xxx $ -0- $xxx,xxx
Direct Labor (xx,xxx × $6) xxx,xxx -0- xxx,xxx
Variable Manufacturing Costs
($xxx,xxx × 60%) xxx,xxx -0- xxx,xxx
Fixed Manufacturing Costs xx,xxxx xx,xxx xxxx
Purchase Price (xx,xxx × $13) -0- xxx,xxx (xxx,xxx)
Total annual cost $xxx,xxx $xxx,xxx $ xx,xxx

Given below are the production data for Department No. 1 for the first month of operation:
Costs charged to Department 1:
Materials $15,000
Labor 2,600
Overhead 17,000
During this first month of operations, 3,000 units were started into production; 2,500 units were transferred out; and the remaining 500 units are 100% complete with respect to materials and 60% complete with respect to conversion costs.

Compute the following:
(a) Unit materials cost.
(b) Equivalent units of conversion costs.
(c) Unit conversion cost.
(d) Total cost of 500 units in process at end of month.
(e) Total cost of 2,500 units transferred out.

Reagan Company planned to produce 25,000 units of product and work 100,000 direct labor hours in 2002. Manufacturing overhead at the 100,000 direct labor hours level of activity was estimated to be:
Variable manufacturing overhead $ 700,000
Fixed manufacturing overhead 300,000
Total manufacturing overhead $1,000,000

At the end of 2002, 26,000 units of product were actually produced and 107,000 actual direct labor hours were worked. Total actual overhead costs for 2002 was $1,015,000.

(a) Compute the total overhead variance.
(b) Compute the overhead controllable variance.
(c) Compute the overhead volume variance.

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