Figure 4-1 The Foremost Company predicted factory overhead for 2013 and 2014 would be $120,000 for each year. The predicted activity for 2013 and 2014 were 30,000 and 20,000 direct labor hours, respectively. Additional data are as follows:
The company assumes that the long-run normal production level is 20,000 direct labor hours per year. The actual factory overhead cost for the end of 2013 and 2014 was $120,000. Assume that it takes one direct labor hour to make one finished unit.
Refer to Figure 4-1. When the annual estimated factory overhead rate is used, the gross profits for 2013 and 2014, respectively, are
A) $150,000 and $150,000.
B) $150,000 and $100,000.
C) $250,000 and $250,000.
D) $100,000 and $150,000.

Question

Figure 4-1 The Foremost Company predicted factory overhead for 2013 and 2014 would be $120,000 for each year. The predicted activity for 2013 and 2014 were 30,000 and 20,000 direct labor hours, respectively. Additional data are as follows:
 The company assumes that the long-run normal production level is 20,000 direct labor hours per year. The actual factory overhead cost for the end of 2013 and 2014 was $120,000. Assume that it takes one direct labor hour to make one finished unit.
Refer to Figure 4-1. When the annual estimated factory overhead rate is used, the gross profits for 2013 and 2014, respectively, are
A) $150,000 and $150,000. 
B) $150,000 and $100,000. 
C) $250,000 and $250,000. 
D) $100,000 and $150,000.

Quizplus · Accepted Answer

To calculate the gross profit, we need to subtract the cost of goods sold from the total sales revenue.

Using the estimated factory overhead rate:

For 2013: 
Cost of goods sold = Direct labor hours x labor cost + Factory overhead cost 
Cost of goods sold = 30,000 x 10 + 120,000 
Cost of goods sold = 450,000

Sales revenue = 600,000

Gross profit = Sales revenue - Cost of goods sold = 600,000 - 450,000 = 150,000

For 2014: 
Cost of goods sold = Direct labor hours x labor cost + Factory overhead cost 
Cost of goods sold = 20,000 x 10 + 120,000 
Cost of goods sold = 320,000

Sales revenue = 400,000

Gross profit = Sales revenue - Cost of goods sold = 400,000 - 320,000 = 80,000

Therefore, the gross profits for 2013 and 2014, respectively, are $150,000 and $80,000, which corresponds to choice B.

Figure 4-1 the Foremost Company Predicted Factory Overhead for 2013