Munoz Sporting Equipment manufactures baseball bats and tennis rackets. Department B produces the baseball bats, and Department T produces the tennis rackets. Munoz currently uses plant-wide allocation to allocate its overhead to all products. Direct labor cost is the allocation base. The rate used is 150 percent of the direct labor cost. Last year, revenue, materials, and direct labor were as follows:
Required:
a. Compute the profit for each product using plant-wide allocation.
b. Maria, the manager of Department T, was convinced that tennis rackets were really more profitable than baseball bats. She asked her colleague in accounting to break down the overhead costs for the two departments. She discovered that department rates been used, Department B would have had a rate of 100 percent of the direct labor cost and Department T would have had a rate of 250 percent of the direct labor cost. Re-compute the profits for each product using each department s allocation rate (based on the direct labor cost).

a.

Baseball Bats Profit = $110,000

Tennis Racket Profit = $429,000

b.

Baseball Bats were more profitable; so, Maria was wrong

Baseball Bats Profit = $300,000

Tennis Racket Profit = $239,000

Explanation:

(See attachment below)

a.

Calculating Profit (Baseball Bat)

Profit = Revenue - (Direct Labour + Direct Material + Overhead)

Revenue = $1,630,000

Direct Labour = $380,000

Direct Material = $570,000

Overhead Cost = 150% * Direct Labour

Overhead Cost = 1.5 * $380,000

Overhead Cost = $570,000

So, Profit = $1,630,000 - ($380,000 + $570,000 + $570,000)

Profit = $1,630,000 - $1,520,000

Profit = $110,000

Calculating Profit (Tennis Racket)

Profit = Revenue - (Direct Labour + Direct Material + Overhead)

Revenue = $1,200,000

Direct Labour = $190,000

Direct Material = $296,000

Overhead Cost = 150% * Direct Labour

Overhead Cost = 1.5 * $190,000

Overhead Cost = $285,000

So, Profit = $1,200,000 - ($190,000 + $296,000 + $285,00)

Profit = $1,200,000 - $771,000

Profit = $429,000

b. Baseball Bats were more profitable; so, Maria was wrong.

Calculating Profit (Baseball Bat)

Profit = Revenue - (Direct Labour + Direct Material + Overhead)

Revenue = $1,630,000

Direct Labour = $380,000

Direct Material = $570,000

Overhead Cost = 100% * Direct Labour

Overhead Cost = 1 * $380,000

Overhead Cost = $380,000

So, Profit = $1,630,000 - ($380,000 + $570,000 + $380,000)

Profit = $1,630,000 - $1,330,000

Profit = $300,000

Calculating Profit (Tennis Racket)

Profit = Revenue - (Direct Labour + Direct Material + Overhead)

Revenue = $1,200,000

Direct Labour = $190,000

Direct Material = $296,000

Overhead Cost = 250% * Direct Labour

Overhead Cost = 2.5 * $190,000

Overhead Cost = $475,000

So, Profit = $1,200,000 - ($190,000 + $296,000 + $475,00)

Profit = $1,200,000 - $961,000

Profit = $239,000

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