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All direct labour is paid at the same hourly rate. A customer has requested a trailer to transport racing motorcycles.
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Pieman Products Ltd. makes road trailers to the precise specifications of its individual customers. The following data is projected for the coming year for use in managerial decision making:
Direct labour cost £160,000
Direct labour time 16,000 hours
Overhead costs (rent, indirect labour, power, etc) £25,000
Machine depreciation £8,000
Machine time 3,000 hours
All direct labour is paid at the same hourly rate. A customer has requested a trailer to transport racing motorcycles. Direct materials and components to build the trailer will cost £1,150. It will take 250 direct labour hours and 50 machine hours to build the trailer.
a. Calculate the direct labour cost of building the trailer.
b. Calculate the direct machine cost of building the trailer.
c. Allocate overhead costs based on direct labour time, and calculate the overhead expense to be allocated to building the trailer.
d. What is the full cost of building the trailer?
e. If the overhead costs are instead allocated based on machine hours, what will be the full cost of building the trailer?
f. Pieman plans to make 50 trailers this year, and an activity-based costing analysis shows that they should allocate overhead expenses on a per trailer basis. Using this method, what will be the activity-based cost of building the trailer?
g. Warranty repairs cost the company on average 10% of the activity-based cost. The company wants to incorporate this cost into its costing analysis. What is the total cost of building the trailer on this basis?
h. To achieve a 20% profit margin on this trailer, using the cost determined in (g), how much should they charge for the trailer?
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