12 Jan Gibson Fabricators Corporation manufactures a vari
Gibson Fabricators Corporation manufactures a variety of parts for the automotive industry. Thecompany uses a job-order costing system with a plantwide predetermined overhead rate based ondirect labour-hours. On the December 10, 2019, the company’s controller made a preliminaryestimate of the predetermined overhead rate for 2020. The new rate was based on the estimatedtotal 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-hourThis new predetermined overhead rate was communicated to top managers in a meeting on theDecember 11. The rate did not cause any comment because it was within a few pennies of theoverhead rate that had been used during 2019.One of the subjects discussed at the meeting was a proposal by the production manager topurchase an automated milling machine centre built by Central Robotics. The president of GibsonFabricators, Kevin Robinson, agreed to meet with the regional sales representative from CentralRobotics to discuss the proposal. On the day following the meeting, Mr. Robinson met with JayWarner, Central Robotics’ sales representative. The following discussion took place:Robinson: Larry Winter, our production manager, asked me to meet with you since he is interestedin installing an automated milling machine centre. Frankly, I am sceptical. You’re going to have toshow 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 hasthree major advantages. First, it is much faster than the manual methods you are using. It canprocess about twice as many parts per hour as your present milling machines. Second, it is muchmore 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 codeof the standard operation, load the machine’s hopper with raw material, and the machine does therest.Robinson: Yeah, but what about cost? Having twice the capacity in the milling machine area won’tdo 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 lowercost. Larry Winters and I looked over your present operations, and we estimated that theautomated equipment would eliminate the need for about 6,000 direct labour-hours a year. Whatis your direct labour cost per hour?Robinson: The wage rate in the milling area averages about $21 per hour. Fringe benefits raise thatfigure to about $30 per hour.Warner: Don’t forget your overhead.