Holly Manufacturing Case Study

Holly Manufacturing Company produces two cello models. One is a standard acoustic cello that sells for $600 and is constructed from medium-grade materials. The other model is a custom-made amplified cello with pearl inlays and a body constructed from special woods.

The custom cello sells for $900. Both cellos require 10 hours of direct labor to produce, but the custom cello is manufactured by more experienced workers who are paid at a higher rate.

Most of Holly’s sales come from the standard cello, but sales of the custom model have been growing. Following is the company’s sales, production, and cost information for last year:

Cello Standard Custom
Sales and production volume in units 900 100
Unit Selling Price $600.00 $900.00
Unit costs: Direct materials $150.00 $375.00 Direct labor $180.00 $240.00 Manufacturing overhead* $135.00 $135.00 Total unit costs $465.00 $750.00
Unit Gross Profit $135.00 $150.00 Direct Labor Hours 10.00 10.00
Direct Labor Rate Per Hour $18.00 $24.00 * Manufacturing overhead costs: Building depreciation $ 40,000 Maintenance 15,000 Purchasing 20,000 Inspection 12,000 Indirect materials 15,000 Supervision 30,000 Supplies 3,000 Total manufacturing overhead costs $135,000
Selling and Administrative expenses: Commission to sales person 3 % of Sales Revenue Advertising, CEO salary, etc. $ 30,000 per year.

* These manufacturing overhead costs are company-wide, fixed in nature: they do not vary with the volume of manufacturing activity.

The company allocates overhead costs using the traditional method. Its activity