Sharpe Fabricators CorporationSharpe Fabricators Corporation manufactures a variety of parts for the

Sharpe Fabricators CorporationSharpe Fabricators Corporation manufactures a variety of parts for the automotive industry.The company uses a job-order costing system with a plant-wide predetermined overhead ratebased on direct labor-hours. On December 10, 2013, the company’s controller made apreliminary estimate of the predetermined overhead rate for 2014. The new rate was basedon the estimated total manufacturing overhead cost of $2,475,000 and the estimated 52,000total direct labor-hours for 2014: $2,475,000 / 52,000 = $47.60 per direct labor hourThis new predetermined overhead rate was communicated to top managers in a meeting onDecember 11. The rate did not cause any comment because it was within a few pennies of theoverhead rate that had been used during 2013. One of the subjects discussed at the meeting was aproposal by the production manager to purchase an automated milling machine center built byCentral Robotics. The president of Sharpe Fabricators, Kevin Reynolds, agreed to meet with theregional sales representative from Central Robotics to discuss the proposal.On the day following the meeting, Mr. Reynolds met with Jay Warner, Central Robotics’ salesrepresentative. The following discussion took place:Reynolds Larry Winter, our production manager, asked me to meet with you since he is:interested in installing an automated milling machine center. Frankly, I amskeptical. You’re going to have to show me this isn’t just another expensive toy forLarry’s people to play with.Warner: That shouldn’t be too difficult, Mr. Reynolds. The automated milling machinecenter has three major advantages. First, it is much faster than the manual methodsyou are using. It can process about twice as many parts per hour as your presentmilling machines. Second, it is much more flexible. There are some up-frontprogramming costs, but once those have been incurred, almost no setup is requiredon the machines for standard operations. You just punch in the code of thestandard operation, load the machine’s hopper with raw material, and the machinedoes the rest. Reynolds Yeah, but what about cost? Having twice the capacity in the milling machine area:won’t do us much good. That center is idle much of the time anyway.Warner: I was getting there. The third advantage of the automated milling machine center islower cost. Larry Winters and I looked over your present operations, and weestimated that the automated equipment would eliminate the need for about 6,000direct labor-hours a year. What is your direct labor cost per hour? Reynolds 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. Reynolds Next year the overhead rate will be about $48 per hour.:Warner: So including fringe benefits and overhead, the cost per direct labor-hour is about$78. Reynolds That’s right.:Warner: Since you can save 6,000 direct labor-hours per year, the cost savings wouldamount to about $468,000 a year. Reynolds That’s pretty impressive, but you aren’t giving away this equipment are you?:Warner: Several options are available, including leasing and outright purchase. Just forcomparison purposes, our 60-month lease plan would require payments of only$300,000 per year. Reynolds Sold! When can you install the equipment?:Shortly after this meeting, Mr. Reynolds informed the company’s controller of the decision tolease the new equipment, which would be installed over the Christmas vacation period. Thecontroller realized that this decision would require a re-computation of the predeterminedoverhead rate for the year 2014 since the decision would affect both the manufacturing overheadand the direct labor-hours for the year. After talking with both the production manager and thesales representative from Central Robotics, the controller discovered that in addition to theannual lease cost of $300,000, the new machine would also require a skilledtechnician/programmer who would have to be hired at a cost of $45,000 per year to maintain andprogram the equipment. Both of these costs would be included in factory overhead. There wouldbe no other changes in total manufacturing overhead cost, which is almost entirely fixed. Thecontroller assumed that the new machine would result in a reduction of 6,000 direct labor-hoursfor the year from the levels that had initially been planned.When the revised predetermined overhead rate for the year 2014 was circulated among thecompany’s top managers, there was considerable dismay.Required:1) Re-compute the predetermined rate assuming that the new machine will be installed. Explainwhy the new predetermined overhead rate is higher (or lower) than the rate that was originallyestimated for the year 2014.2) What effect (if any) would this new rate have on the cost of jobs that do not use the new automated milling machine? Why?3) Why would managers be concerned about the new overhead rate?4) After seeing the new predetermined overhead rate, the production manager admitted that sheprobably wouldn’t be able to eliminate all of the 6,000 direct labor-hours. She had been hopingto accomplish the reduction by not replacing workers who retire or quit, but that would not bepossible. As a result, the real labor savings would be only about 2,000 hours—one worker. In thelight of this additional information, evaluate the original decision to acquire the automatedmilling machine from Central Robotics.