Question

Manchester Technology, Inc. manufactures several different types of printed circuit boards; however, two of the boards account for the majority of the company's sales. The first of these boards, a television circuit board, has been a standard in the industry for several years. The market for this type of board is competitive and price-sensitive. Manchester plans to sell 69,000 of the TV boards in 20x1 at a price of $430 per unit. The second high-volume product, a personal computer circuit board, is a recent addition to Manchester's product line. Because the PC board incorporates the latest technology, it can be sold at a premium price. The 20x1 plans include the sale of 44,000 PC boards at $750 per unit. Manchester's management group is meeting to discuss how to spend the sales and promotion dollars for 20x1. The sales manager believes that the market share for the TV board could be expanded by concentrating Manchester's promotional efforts in this area. In response to this suggestion, the production manager said, "Why don't you go after a bigger market for the PC board? The cost sheets that I get show that the contribution from a PC board is significantly larger than the contribution from a TV board. I know we get a premium price for the PC board. Selling it should help overall profitability." The cost-accounting system shows that the following costs apply to the PC and TV boards. Direct material Direct labor Machine time PC Board $223 3.5 hr 1.5 hr. TV Board $143 1.0 hr. 1.0 hr. Variable manufacturing overhead is applied on the basis of direct-labor hours. For 20x1, variable overhead is budgeted at $2,300,000, and direct-labor hours are estimated at 234,150. The hourly rates for machine time and direct labor are $28 and $36, respectively. The company applies a material handling charge at 10 percent of material cost. This material handling charge is not included in variable manufacturing overhead. Total 20x1 expenditures for direct material are budgeted at $19,679,000. Andrew Fulton, Manchester's controller, believes that before the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, it might be worthwhile to look at these products on the basis of the activities involved in their production. Fulton has prepared the following schedule to help the management group understand this concept. "Using this information," Fulton explained, we can calculate an activity-based cost for each TV board and each PC board and then compare it to the standard cost we have been using. The only cost that remains the same for both cost methods is the cost of direct material. The cost drivers will replace the direct labor, machine time, and overhead costs in the old standard cost figures." Cost Driver Number of parts Number of boards Number of boards Budgeted Annual Activity for Cost Driver 5,084,100 parts 118,650 boards 118,650 boards Budgeted Cost Procurement Production scheduling Packaging and shipping Total Machine setup Hazardous waste disposal Quality control General supplies Total Machine insertion Manual insertion Wave-soldering Total $ 840,000 460,000 920,000 $ 2,220,000 $ 908,000 104,000 1,144,000 144,000 $ 2,300,000 $ 2,600,000 8,400,000 284,000 $11,284,000 Number of setups Pounds of waste Number of inspections Number of boards 283,500 setups 32,067 pounds 283,500 inspections 118,650 boards Number of parts Number of parts Number of boards 3,681,000 parts 1,310,000 parts 118,650 boards PC Board TV Board 30 29 Required per Unit Parts: Machine insertions Manual insertions Machine setups Hazardous waste disposal, in lb. Inspections Required: 1. Identify at least four general advantages associated with activity-based costing. 2. On the basis of Manchester's unit cost data given in the problem, calculate the total amount that each of the two product lines will contribute toward covering fixed costs and profit in 20x1. 3. Using activity-based costing, calculate the total amount that each of the two product lines will contribute toward covering fixed costs and profit in 20x1. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 On the basis of Manchester's unit cost data given in the problem, calculate the total amount that each of the two product lines will contribute toward covering fixed costs and profit in 20x1. (Round your intermediate calculations to 2 decimal places.) PC Board TV Board Total contribution margin < Required 1 Required 3 >

Answer 1

Part C
Calculation of total Contribution margin under activity based costing method:
Expense		Cost driver	Total cost ($)	Annual activity per cost driver		Cost per unit ($)
Procurement		No. of parts	840,000	5,084,100		0.17
Production scheduling		No. of boards	460,000	118,650		3.88
Packaging and shipping		No. of boards	920,000	118,650		7.75
Machine setup		No. of setups	908,000	283,500		3.20
Hazardous waste disposal		Pounds of waste	104,000	32,067		3.24
Quality control		No. of inspections	1,144,000	283,500		4.04
General supplies		No. of boards	144,000	118,650		1.21
Machine insertion		No. of parts	2,600,000	3,681,000		0.71
Manual insertion		No. of parts	8,400,000	1,310,000		6.41
Wave-soldering		No. of boards	284,000	118,650		2.39
Calculation of total Contribution margin under activity based costing method:
				PC Board			TV Board
Number of boards to be sold		(a)		44,000			69,000
Price per unit		(b)		750			430
Total revenue		(c ) = (a)*(b)		33,000,000			29,670,000
			PC Board			TV Board
Variable costs			Per unit	Total		Per unit	Total
Direct Material Cost		(Per unit cost*No. of boards)	223.00	9,812,000		143.00	9,867,000
Procurement
Parts required per unit			63			30
Total parts required		(Parts required per unit*Total boards)	2,772,000			2,070,000
Procurement cost		(Total parts required*cost per unit)	0.17	457,993		0.17	342,007
Production scheduling		(Number of boards*cost per unit)	3.88	170,586		3.88	267,509
Packaging and shipping		(Number of boards*cost per unit)	7.75	341,172		7.75	535,019
Machine setup
Number of setups required per unit			3			2
Total setups required		(Setup per unit*Total boards)	132,000			138,000
Setup cost		(Total setups required*cost per unit)	3.20	422,772		3.20	441,989
Hazardous waste disposal
Waste disposed per unit			0.60			0.06
Total waste disposed		(waste disposed per unit*Total boards)	26,400			4,140
Disposal cost		(Total waste disposed*cost per unit)	3.24	85,621		3.24	13,427
Quality control
Number of inspections required per unit			3			2
Total inspections required		(Inspections per unit*Total boards)	132,000			138,000
Setup cost		(Total inspections required*cost per unit)	4.04	532,656		4.04	556,868
General supplies		(Number of boards*cost per unit)	1.21	53,401		1.21	83,742
Machine insertion
Machine Insertions per unit			40			29
Total insertions required		(Machine insertions per unit*Total boards)	1,760,000			2,001,000
Machine Insertion cost		(Total insertions required*cost per unit)	0.71	1,243,140		0.71	1,413,366
Manual insertion
Manual Insertions per unit			23			1
Total insertions required		(Manual insertions per unit*Total boards)	1,012,000			69,000
Manual Insertion cost		(Total insertions required*cost per unit)	6.41	6,489,160		6.41	442,443
Wave-soldering		(Number of boards*cost per unit)	2.39	105,318		2.39	165,158
Total Variable costs		(d)		19,713,819			14,128,529
Contribution margin		(e) = ( c) - (d)		13,286,181			15,541,471