Answer to Question #338294 in Management for Rachel

Question

Lungameni Enterprises manufactures Product A selling it to the local customers at a mark up of 25%. They currently absorbs overhead costs on the basis of direct labour hours. Production volume for product A was estimated at 1000 units. Only 80% of production volume was achieved. Standard practice product A require 0.5 hours at an hourly rate of N$8.50. The 80% production volume produced at 45 minutes per unit and hourly rate of N$8.00. Raw materials are bought from local suppliers at N$3.50 per kilogram. Each unit require 1.5 kilograms. Two kilograms was used, monthly manufacturing overhead costs amounted to N$1200. The production manager view that manufacturing overhead cost be absorbed on basis of direct labour cost.

Required:

On the basis of gross profit / loss do we agree with Lungameni Enterprises production managers recommendation? show all the workings.