Joanne Marie R. Bagsic
BSA 311
I. PROBLEM SOLVING (3 items x 10 points)
Perform what is being asked. Write your answers on a separate sheet of paper.
Potter Inc. manufactures figurines. All figurines are approximately the same size, but some are plain
ceramic whereas others are “fancy,” with paints and smooth finish. 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 P5,017,500. Some additional data are as
follows:
CERAMIC
P15,000,000
P8,250,000
1,500,000
200,000
34,500
1,000
Revenues
Direct Costs
Production (units)
Machine Hours
Direct Labor Hours
Number of Inspections
FANCY
P16,800,000
P8,750,000
350,000
50,000
153,625
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.
Total Production Overhead
Divided by: Machine Hours
Ceramic
Fancy
Overhead Rate
P 5,017,500
200,000
50,000
250,000
P 20.07
Ceramic
Machine hours
Multiplies by: Overhead Rate
Overhead Rate
P 200,000
20.07
P 4,104,500
Fancy
P 50,000
20.07
P 1,003,500
Ceramic
Revenue
Less: Direct Costs
Overhead Costs
Profit
Fancy
P 15,000,000
P 8,250,000
4,014.,500
12,264,000
P 2,736,000
P 16,800,000
P 8,750,000
1,003,500
9,753,500
P 7,046,500
The production of Ceramics should not be stopped. Though the profit of Ceramic is lower as
compared to Fancy, but still, Ceramics contributed in the income of Potter Inc., if the
production of ceramics will be stop, the total overhead will be shoulder by Fancy, thus giving
a lower income as compare to having both.
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b. The cost accountant has determined that production overhead costs can be assigned to
separate cost pools. Pool #1 contains P1,260,000 of overhead costs for which the most
appropriate cost driver is machine hours; Pool #2 contains P2,257,500 of overhead costs for
which the most appropriate cost driver is direct labor hours; and Pool #3 contains P1,500,000
of overhead costs for which the most appropriate cost driver is the number of inspections.
Compute the overhead cost that should be allocated to each type of figurine using different
types of cost drivers.
Machine Hours
Direct Labor Hours
Number of Inspections
Pool #1
Pool #2
Pool #3
TOTAL
c.
Overhead Costs
1,260,000
2,257,500
1,500,000
Ceramic
200,000
34,500
1,000
Fancy
50,000
153,625
6,500
Total
250,000
188,125
7,500
1,008,000
414,000
200,000
1,622,000
252,000
1,843,500
1,300,000
3,395,500
1,260,000
2,257,500
1,500,000
5,017,500
Discuss whether the company should continue to manufacture both types of figurines.
The company should continue to the production of both types of figurines because each
type has different market. If the production of Ceramics will discontinue, there is no
assurance that the revenue generated by Ceramics will be generated as additional revenue
to Fancy figurines. I think what the company can do is to distribute the overhead properly
and just adjust the production so that they can minimize the costs of production, hence,
maximize the profitability of the Company.
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