Madison Electric Pump Corporation manufactures electric pumps
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Madison Electric Pump Corporation manufactures electric pumps for commercial use. The company produces three models, designated as regular, advanced, and deluxe. The company uses a job-order cost accounting system with manufacturing overhead applied on the basis of direct-labor hours. The system has been in place with little change for 25 years. Product costs and annual sales data are as follows: Regular Model Advanced Model Deluxe Model Annual sales (units) ………………………… 20,000 1,000 10,000 Product costs: Direct material …………………………… $ 20 $ 50 $ 84 Direct labor ………………………………. 20 (1 hr. at $20) 40 (2 hr. at $20) 40 (2 hr. at $20) Manufacturing overhead* …………… . 170 (1 hr. at $170) 340 (2 hr. at $170) 340 (2 hr. at $170) Total product cost ………………………….. $210 $430 $464 ■ Depreciation, machinery ……………………………………………………………………………………………………. $2,960,000 Maintenance, machinery …………………………………………………………………………………………………… 240,000 Depreciation, taxes, and insurance for factory ………………………………………………………………………… 600,000 Engineering ……………………………………………………………………………………………………………………. 700,000 Purchasing, receiving and shipping ……………………………………………………………………………………… 500,000 Inspection and repair of defects ………………………………………………………………………………………….. 750,000 Material handling …………………………………………………………………………………………………………….. 800,000 Miscellaneous manufacturing overhead costs ………………………………………………………………………… 590,000 Total ……………………………………………………………………………………………………………………………… $7,140,000 *The calculation of the predetermined overhead rate is as follows: Manufacturing-overhead budget: Direct-labor budget: Regular model: 20,000 hours Advanced model: 2,000 hours Deluxe model: 20,000 hours Total 42,000 hours Predetermined overhead rate: Budgeted overhead Budgeted direct-labor hours $7,140, 000 42,000 hours $170 per hour For the past 10 years, the company’s pricing formula has been to set each product’s target price at 110 percent of its full product cost. Recently, however, the regular-model pump has come under increas- ing price pressure from offshore competitors. The result was that the price on the regular model has been lowered to $220. The company president recently asked the controller, “Why can’t we compete with these other companies? They’re selling pumps just like our regular model for $212. That’s only two bucks more than our production cost. Are
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