CASE 3A - AUERBACH ENTERPRISES

Auerbach Enterprises manufactures air conditioners for automobiles and trucks manufactured throughout North America. The company designs its products with flexibility to accommodate many makes and models of automobiles and trucks. The company's two main products are Maxi Flow and Alaska. Maxi Flowuses a few complex fabricated parts, but these have been found easy to assemble and test. On the other hand, Alaska uses many standard parts but has a complex assembly and testing process. Maxi Flow requires direct materials costs which total $135 per unit, while Alaska's direct materials requirements total $110 per unit. Direct labor costs per unit are $75 for Maxi Flow and $95 for Alaska.

Auerbach Enterprises uses machine hours as the cost driver to assign overhead costs to the air conditioners. The company has used a company-wide predetermined overhead rate in past years, but the new controller, Bennie Leon, is considering the use of departmental overhead rates beginning with the next year.

The following planning information is available for the next year for each the four manufacturing departments within the company:

Overhead Machine
Costs Hours
Radiator parts fabrication.............. $ 80,000 10,000
Radiator assembly, weld, and test.... 100,000 20,000
Compressor parts fabrication.......... 120,000 5,000
Compressor assembly and test........ 180,000 45,000
Total $480,000 80,000

Normally, the air conditioners are produced in batch sizes of 20 at a time. A production batch of 20 units requires the following number of hours in each department:

Maxi Flow Alaska
Radiator parts fabrication........... 28 16
Radiator assembly, weld, and test....... 30 74
Compressor parts fabrication......... 32 8
Compressor assembly and test......... 26 66
Total 116 164

Required:

1. Compute the departmental overhead rates using machine hours as the cost driver.

2. Compute a company-wide overhead rate using machine hours as the cost driver.

3. Compute the overhead costs per batch of Maxi Flow and Alaska assuming:

(a) The company-wide rate.
(b) The departmental rates.

4. Compute the total costs per unit of Maxi Flow and Alaska assuming:

(a) The company-wide rate.
(b) The departmental rates.

5. Is one product affected more than the other by use of departmental rates rather than a company-wide rate? Why or why not?

For Questions 1 through 4, you will need to complete several calculations. Be sure to label and clearly identify your work to demonstrate your understanding of the concept even if you arrive at the incorrect answer. The calculations should be included as part of your analysis and written recommendations required for submission.

For Question 5, fully address management's concerns as part of your written analysis and recommendation using the new or the previous calculations to support your recommendation/explanation.