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Aerosphere Corporation manufactures small aeroplanes. Manufacturing is divided into 4 divisions, each having a manager who is responsible for the divisions costs. Manager receives annual bonusses based on their ability to control costs in their division. The company uses a job-order costing system with a plantwide predetermined overhead rate based on direct labour hours. The predetermined overhead rate for 2021 was calculated as $48 per direct labour hours (budgeted total manufacturing overhead cost of $2,720,300 divided by budgeted total direct labour hours of 56,700). Manufacturing overhead costs are mostly fixed.

George Pollard, the manager of one of the divisions, requested that the company purchase a new machine for his department. His department is quite labour-intensive and hourly wages have been increasing steadily over the last few years. The new machine incorporates the latest technology and would significantly automate the production process in Georges department. George estimates that 5,000 direct labour hours at a direct labour cost of $42 per hour can be eliminated with the new machine. In making the case to acquire the new machine, George showed that the elimination of 5,000 direct labour hours will lead to annual savings of $450,000 (5,000 hours x ($48 manufacturing overhead allocated per direct labour hour + $42 per direct labour hour)).

The company decided to acquire the machine. The machine will be leased for $275,000 per year. The company will have to hire a new employee to operate the machine at a salary of $55,000 per year.

The companys controller was asked to calculate a new predetermined overhead rate that included the costs associated with the new machine and circulate it to all the division managers. When the other division managers saw the new predetermined overhead rate, they were very upset.

Required:

1. Calculate the new predetermined overhead rate assuming that the new machine will be acquired. Explain why the rate is higher or lower than the original rate. (5 marks)
2. Explain why the other managers are upset about the new predetermined overhead rate. How could this problem have been avoided? (4 marks)
3. Evaluate the decision to acquire the new machine. Explain, with calculations as necessary, whether you believe it was a good or bad decision to acquire the new machine. (6 marks)

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