Falcon Company Manufactures and Sells Two Models of a Computer

Falcon Company manufactures and sells two models of a computer tablets. The Basic Model has limited networking capability while the Explorer Model has significantly more features. The tablets are produced to order and the company has no inventories at the end of the year.
The cost accounting system at Falcon allocates overhead to products based on direct-labor cost. Overhead in year 1, which just ended, was $3,412,500. Other data for year 1 for the two products follow:
$\begin{array}{lrr}& \text { Basic Model } & \text { Explorer Model } \\& ( 20,000 \text { units } ) & ( 3,000 \text { units }) \\\text { Sales revenue } & \$ 6,600,000 & \$ 3,645,000 \\\text { Direct materials } & 3,200,000 & 450,000 \\\text { Direct labor } & 1,600,000 & 675,000\end{array}$
Required:
a. Compute product line profits for the Basic Model and the Explorer Model for year 1.
b. A study of overhead shows that without the Basic Model, overhead would fall to $2,750,000. Assume all other revenues and costs would remain the same for the Explorer Model in year 2. Compute product line profits for the Explorer Model in year 2 assuming the Basic Model was not produced or sold.

Correct Answer:

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a. ⁽¹⁾ 150% = ($3,412,500 overhead ÷ $2,27...

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