Problem

Massey Electronics manufactures heat sinks. Heat sinks are small devices attached to solid-state circuit boards that dissipate the heat from the circuit board components. Made of aluminum, the devices consist of many small fins cut in the metal to increase its surface area and hence its ability to dissipate the heat. For example, Intel Pentium and Celeron processors are first mounted onto heat sinks and then attached to circuit boards. These processors generate heat that will ultimately destroy the processor and other components on the circuit board without a heat sink to disperse the heat.

Massey has two production facilities, one in Texas and the other in Mexico. Both produce a wide range of heat sinks that are sold by the three Massey lines of business: laptops and PCs, servers, and telecommunications. The three lines of business are profit centers, whereas the two plants are cost centers. Products produced by each plant are charged to the lines of business selling the heat sinks at full absorption cost, including all manufacturing overheads. Both plants supply heat sinks to each line of business.

The Texas plant produces more complicated heat sinks that require tighter engineering tolerances. The Texas workforce is more skilled, but more expensive. The Mexico plant is larger and employs more people. Both facilities utilize a set of shared manufacturing resources: a common manufacturing IT system that schedules and controls the manufacturing process, inventory control, and cost accounting, industrial engineers, payroll processing, and quality control. These shared manufacturing over resources cost Massey $9.5 million annually.

Massey is considering four ways to allocate this $9.5 million manufacturing overhead cost pool: direct labor hours, direct labor dollars, direct material dollars, or square footage of the two plants.

The following table summarizes the operations of the two plants:

Massey has significant tax loss carryforwards due to prior losses and hence expects no income tax liability in any tax jurisdiction where it operates for the next five years.

1. Read the problem and submit a table that includes the information in the table presented below.

2. Massey allocates a share of the overhead cost pool to the plant in Mexico. If Mexico has a lower tax rate than the United States, which method of allocation should Massey choose if the goal is to lower taxes payable?

3. If the bonus of the plant manager in Texas is computed on the basis of reducing costs attributed to the Texas plant after the allocation for the overhead cost pool, which method of allocation would result in the greatest bonus for the manager of the Texas plant?