Gibson Fabricators Corporation manufactures a variety of parts for the automotive industry…. 1 answer below »


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Gibson Fabricators Corporation manufactures a variety of parts for the automotive industry. The
company uses a job-order costing system with a plantwide predetermined overhead rate based on
direct labour-hours. On the December 10, 2019, the company’s controller made a preliminary
estimate of the predetermined overhead rate for 2020. The new rate was based on the estimated
total manufacturing overhead cost of $2,475,000 and the estimated 52,000 total direct labourhours for 2020:
Predetermined overhead rate = $2,475,000/ 52,000 hours
= $47.60 per direct labour-hour
This new predetermined overhead rate was communicated to top managers in a meeting on the
December 11. The rate did not cause any comment because it was within a few pennies of the
overhead rate that had been used during 2019.
One of the subjects discussed at the meeting was a proposal by the production manager to
purchase an automated milling machine centre built by Central Robotics. The president of Gibson
Fabricators, Kevin Robinson, agreed to meet with the regional sales representative from Central
Robotics to discuss the proposal. On the day following the meeting, Mr. Robinson met with Jay
Warner, Central Robotics’ sales representative. The following discussion took place:
Robinson: Larry Winter, our production manager, asked me to meet with you since he is interested
in installing an automated milling machine centre. Frankly, I am sceptical. You’re going to have to
show me this isn’t just another expensive toy for Larry’s people to play with.
Warner: That shouldn’t be too difficult, Mr. Robinson. The automated milling machine centre has
three major advantages. First, it is much faster than the manual methods you are using. It can
process about twice as many parts per hour as your present milling machines. Second, it is much
more flexible. There are some up-front programming costs, but once those have been incurred,
almost no setup is required on the machines for standard operations. You just punch in the code
of the standard operation, load the machine’s hopper with raw material, and the machine does the
Robinson: Yeah, but what about cost? Having twice the capacity in the milling machine area won’t
do us much good. That centre is idle much of the time anyway.
Warner: I was getting there. The third advantage of the automated milling machine centre is lower
cost. Larry Winters and I looked over your present operations, and we estimated that the
automated equipment would eliminate the need for about 6,000 direct labour-hours a year. What
is your direct labour cost per hour?
Robinson: The wage rate in the milling area averages about $21 per hour. Fringe benefits raise that
figure to about $30 per hour.
Warner: Don’t forget your overhead.