Morrison Company carefully records its costs because it bases prices on the cost of the goods it manufactures. Morrison also carefully records its machine usage and other operational information. Manufacturing costs are computed monthly, and prices for the next month are determined by adding a 20% markup to each product's manufacturing cost. The support activity cost driver rate is based on machine hours, shown below:
Month ActualMachine Hours
January 1,350
February 1,400
March 1,500
April 1,450
May 1,450
June 1,400
July 1,400
August 1,400
September 1,500
October 1,600
November 1,600
December 1,600
Profits have been acceptable until the past year, but Morrison has recently faced increased competition. The marketing manger reported that Morrison's sales forced finds the company's pricing puzzling. When demand is high, the company's prices are low, and when demand is low, the company's prices are high. Practical capacity is 1,500 machine hours per month. Practical capacity is exceeded in some months by operating the machines overtime beyond regular shifthours. Monthly machine-related costs, all fixed, are $70,000 permonth.
a. Compute the monthly support cost driver rates that Morrison used last year.
b. Suggest a better approach to developing cost driver rates for Morrison and explain, why your method is better.