Taveras Corporation is currently operating at 50% of its available manufacturing capacity. It uses a job-order costing system with a plantwide predetermined overhead rate based on machine-hours. At the beginning of the year, the company made the following estimates:
Machine-hours required to support estimated production . . . . 165,000
Fixed manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . . . . $1,980,000
Variable manufacturing overhead cost per machine-hour . . . . $2.00
Required: 1. Compute the plantwide predetermined overhead rate. 2. During the year, Job P90 was started, completed, and sold to the customer for $2,500. The following information was available with respect to this job:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,150
Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $830
Machine-hours used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Compute the total manufacturing cost assigned to Job P90. 3. Upon comparing Job P90’s sales revenue to its total manufacturing cost, the company’s chief financial officer said "If this exact same opportunity walked through our front door tomorrow, I’d turn it down rather than making it and selling it for $2,500.
a. Construct an argument (supported by numerical analysis) that refutes the chief financial officer’s assertion.
b. Construct an argument (accompanied by numerical analysis) that supports the chief financial officer’s assertion.

Since the plant is operating only at 50% of its capacity, the overhead expenses are exaggerated and the priority is to increase the use of our plant. As long as the selling price is higher than the variable costs, then we should accept more jobs. That way we would increase the plant utilization rate and hopefully that will help to decrease plantwide overhead rate and average total costs.

total variable costs of Job P90 = $2,124 which is much lower than the selling price of $2,500.

3.b. Construct an argument (accompanied by numerical analysis) that supports the chief financial officer’s assertion.

Our efforts to increase the plant utilization rate are not going well, and we cannot afford to sell products at a price lower than the total cost since that results in a loss instead of a profit. We lost $2,988 - $2,500 = $488 with Job P90 and if we continue this way, we might have to close soon. The only way to keep a business running on the long run is that the selling price is ≥ than costs.