Gibson Fabricators Corporation manufactures a variety of parts for the automotive industry….

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Gibson Fabricators Corporation

Gibson Fabricators Corporation manufactures a variety of parts for the automotive industry. The

company uses a job-order costing system with a plantwide predetermined overhead rate based on

direct labour-hours. On the December 10, 2019, the company’s controller made a preliminary

estimate of the predetermined overhead rate for 2020. The new rate was based on the estimated

total 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-hour

This new predetermined overhead rate was communicated to top managers in a meeting on the

December 11. The rate did not cause any comment because it was within a few pennies of the

overhead rate that had been used during 2019.

One of the subjects discussed at the meeting was a proposal by the production manager to

purchase an automated milling machine centre built by Central Robotics. The president of Gibson

Fabricators, Kevin Robinson, agreed to meet with the regional sales representative from Central

Robotics to discuss the proposal. On the day following the meeting, Mr. Robinson met with Jay

Warner, Central Robotics’ sales representative. The following discussion took place:

Robinson: Larry Winter, our production manager, asked me to meet with you since he is interested

in installing an automated milling machine centre. Frankly, I am sceptical. You’re going to have to

show 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 has

three major advantages. First, it is much faster than the manual methods you are using. It can

process about twice as many parts per hour as your present milling machines. Second, it is much

more 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 code

of the standard operation, load the machine’s hopper with raw material, and the machine does the

rest.

Robinson: Yeah, but what about cost? Having twice the capacity in the milling machine area won’t

do 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 lower

cost. Larry Winters and I looked over your present operations, and we estimated that the

automated equipment would eliminate the need for about 6,000 direct labour-hours a year. What

is your direct labour cost per hour?

Robinson: The wage rate in the milling area averages about $21 per hour. Fringe benefits raise that

figure to about $30 per hour.

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