Figure 2
The management of Chott Industries predicted that overhead cost would total £180,000 for the current year. Management further estimated that under absolutely perfect conditions they could produce 25,000 units. Under efficient conditions, they can produce 23,000 units. The product is expected to appeal to the public for approximately three years during which time Chott expects to sell a total of 60,000 units. Because poor economic conditions are forecast for the upcoming year, Chott plans to produce only 18,000 units.
-Refer to Figure 2. What will Chott's overhead application rate be if Chott uses practical capacity?
A) £10.00
B) £7.20
C) £7.83
D) £9.00

Question

Quizplus · Accepted Answer

Overhead application rate = Estimated total overheads/Estimated practical capacity
= £180,000/25,000 units (perfect conditions)
= £7.20 per unit

Since Chott is operating under efficient conditions, estimated practical capacity is 23,000 units. Therefore, overhead application rate using practical capacity = £180,000/23,000 units = £7.83 per unit.

Figure 2 The Management of Chott Industries Predicted That Overhead Cost Would