1) What caused the existing system at ETO to fail?
This system was based on the assumption that direct costs and overhead are consumed in the same proportion for all product testing. However, this is not the case and therefore the system failed. For example, due to the implementation of the vendor certification and the just-in-time delivery, some products are already tested and do not need any further tests, and ETO faces a decreasing number of the tests performed.
On the other hand, new components require more high technology tests. They consume highly automated equipment and require different testing procedures compared to other products.

2) Calculate the reported costs of the five components using:
a. The existing system
With a …show more content…
5) Would you treat the new machine as separate cost center or as part of the main test room? Why?
Using the information on Exhibit 5 and Exhibit 7, we can calculate the burden rate if the machine is assigned a separate cost center and if the machine is considered part of the main room. If we treat the new testing machine as part of the main test room, the burden rate will be distorted, and therefore the new machine should have a separate cost center.
1) The machine is assigned a separate cost center: If assigned a separate cost center
Year Variable Depreciation Other Total (1) Hours (2) Burden rate (1/2)
Year 1 100.000 500.000 225.000 825.000 400 2.062,5
Year 2 100.000 375.000 150.000 625.000 1.4001 446,4
Year 3 100.000 281.250 150.000 531.250 2.400 221,4
Year 4 100.000 210.938 150.000 460.938 2.400 192,1
Year 5 100.000 158.203 150.000 408.203 2.400 170,1
Year 6 100.000 118.652 150.000 368.652 2.400 153,6
Year 7 100.000 88.989 150.000 338.989 2.400 141,2
Year 8 100.000 66.742 150.000 316.742 2.400 132,0

2) The machine is considered part of the main room: If part of the main room
Year Variable Depreciation Other Total (1) Hours (2) Main room costs (3) Main room hours (4) Burden rate (1+3)/(2+4)
Year 1 100.000 500.000 225.000 825.000 400 2.103.116 33.201 87,1
Year 2 100.000