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Drury Tire Company (DTC) is a manufacturing company that produces tires and manufactures over 200 different tires and sizes in its Memphis plant. In 2018, DTC automated the Memphis, Tennessee plant to take advantage of reasonably priced cutting-edge technology. Before automation, DTC used a single plantwide rate to allocate conversion costs using direct labor hours. At that time, the correlation between conversion costs and direct labor hours was 0.645. Because of the technological improvements, the number of direct labor hours was cut in half.

Alfred Olson, the Controller at DTC, was concerned with the accuracy of the assignment of product costs. Alfred had recently attended a seminar on activity-based costing and was interested in how it may improve DTCs ability to assign indirect costs to the tires and thus may likewise enhance its pricing decisions.

James Jetter is the Chief Executive Officer (CEO) of DTC in Memphis, Tennessee. Before becoming the CEO in 2012, he served as the Chief Operating Officer (COO) for 8 years. DTC has its international headquarters in Memphis, Tennessee. Currently, DTC has three manufacturing plants in the United States, as well as a plant in Cortez, Mexico. The other two locations in the United States are in Casper, Wyoming and Cleveland, Ohio.

DTC manufactures tires in seven different tire types; all-season, light/medium truck, passenger, performance, summer, touring and winter. Additionally, DTC produces seven different brands with over 70 different models, and produces 20 different tire widths, with aspect ratios from 20 to 85, and tire diameters between 15 and 20 inches. As mentioned previously, DTC produces more than 200 different tires and sizes in the Memphis plant and employs between 2,000 to 3,000 employees during its slow and busy seasons, respectively.

As the Controller of DTC, Alfred Olson has gathered data after the automation of the Memphis manufacturing plant. He has provided this data in a Microsoft Excel spreadsheet file referred to as Data Set 1. In this data file, he has provided the total conversion costs and direct labor hours for 48 daily observations.

Data Set 1 provides enough data to do a simple regression model and/or measure the correlation between variables. Again, Alfred is concerned with the relationship between total conversion costs and direct labor hours, because of the investment in new technology. Currently, DTC allocates conversion costs using direct labor hours based on an average of the 48 observations. In other words, DTC finds the sum of the total conversion costs and direct labor hours over the 48 observations. Then DTC finds the predetermined conversion costs rate by dividing the total conversion costs by the total direct labor hours. Meanwhile, material costs are assigned directly to the tires. Direct labor costs are assigned as part of the conversion costs.

Last month, DTC manufactured 27,000 DTC/A105 and 7,000 DTC/B107 tires. DTC/A105 is a more popular tire that is produced in larger batches than DTC/B107. Additionally, the average direct materials costs for DTC/A105 and DTC/B107 are $64 and $98, respectively. While the DTC/A105 fits on a common family car or van, the DTC/B107 is not suitable for the family vehicles because it is a larger tire.

The direct labor hours used to produce DTC/A105 and DTC/B107 last month were:

DTC/A105 14,000 direct labor hours

DTC/B107 3,500 direct labor hours

Data Set 1:

Using Excel / Excel Hint Below:

1. Alfred Olson has provided you with the first data set. Also, he has informed you that DTC is currently assigning conversion costs to all tires based on the average conversion cost per direct labor hour for the 48 observations. James Jetter, the CEO of DTC, would like to know the total product costs and unit costs for DTC/A105 and DTC/B107. In addition to the total product costs and unit costs for DTC/A105 and DTC/B107, he would also like to know the strength of the relationship between direct labor hours and total conversion costs. Has this relationship improved or weakened since automation?

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