Solved: Dewan Locks produces and sells a keyless bicycle

lock that

Dewan Locks produces and sells a keyless bicycle lock that uses a small wireless fob to lock
and unlock the lock without the need of a key. Dewan produces two models: one for the
European market (EU) and one for North America (NA). Dewan started producing the North
American lock at its Eastbury plant, and then introduced the EU model, which was also
assembled in the Eastbury plant. When demand for both models grew and exceeded the
capacity of Eastbury, Dewan leased the Westbury plant. Following the weakening global
economy, Dewan saw the demand for its locks from both Europe and North America fall. This
caused Dewan's total profits to plummet. The following table summarizes operations for the last
fiscal quarter.

To address the current operating loss of $100,000, Dewan owners are moving the EU lock
production from the Westbury plant to the Eastbury plant where it now has excess capacity due
to the declining sales of the NA lock, and since the lease on the Westbury plant is expiring
soon. By canceling the lease of the Westbury plant and moving the EU locks back to the
Eastbury plant, the fixed manufacturing overhead of producing EU locks will fall from its current
level of $630,000 to $210,000. In other words, Dewan will save the lease and occupancy cost of
the Westbury plant ($630,000) but will have to incur additional fixed manufacturing cost of
$210,000 in Eastbury to produce the EU locks in Eastbury. Stated differently, with both plants in
operation, Dewan's total fixed manufacturing overhead is $1,140,000 ($630,000 + $510,000).
Total manufacturing overhead will be $720,000 ($510,000 + $210,000) by consolidating both
NA and EU lock production into the Eastbury plant.

The EU and the NA locks are separate profit centers with the managers of the two profit centers
evaluated and compensated based on the operating income of their respective profit centers.

Required:

a. Dewan still expects to sell 11,000 locks in Europe and 17,000 in North America. By closing
the Westbury plant and producing both the NA and the EU locks in Eastbury, what happens to
Dewan's operating income?

b. After consolidating production of the NA and EU locks in the Eastbury plant, Dewan needs to
allocate the $720,000 of common fixed manufacturing overhead of the Eastbury plant to the two
profit centers (NA locks and EU locks). The $720,000 of Eastbury's common fixed
manufacturing overhead to the two profit centers is to be allocated using total contribution
margin (unit sales times the difference between selling price and variable cost per unit) as the
allocation base. Using total contribution margin to allocate the manufacturing overhead to the
two profit centers, prepare operating income statements for the NA locks and EU locks profit
centers for last quarter as if the Westbury plant has closed and all locks are produced in

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 Eastbury.

c. After seeing the operating income statements prepared in part b, the manager of the NA lock
profit center argues, "Something must be wrong in these operating income statements. Why
should the NA lock operating income change just because EU locks are now being produced in
Eastbury? I haven't done anything differently, so why is NA Locks being penalized for closing
Westbury plant and moving the EU locks into Eastbury? All of the benefits of closing Westbury
seem to accrue to EU Locks and none to NA Locks." Write a memo to Dewan's president
explaining whether the arguments by the manager of the NA Locks profit center have any
merits.

d. Would you recommend using the overhead allocation scheme described in part (b), or would
you propose an alternative allocation scheme? And if so, what scheme would you recommend,
and why?

Dewan Locks produces and sells a keyless bicycle lock that

ANSWER
https://solvedquest.com/dewan-locks-produces-and-sells-a-keyless-bicycle-lock-that/

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