Question

ABC Versus ABM Harvey Company produces two models of blenders: the "Super Model” (priced at $396) and the "Special Model" (priced at $203). Recently, Harvey has been losing market share with its Special Model because of competitors offering blenders with the same quality and features but at a lower price. A careful market study revealed that if Harvey could reduce the price of its Special Model to $182, it would regain its former share of the market. Management, however, is convinced that any price reduction must be accompanied by a cost reduction of the same amount so that per-unit profitability is not affected. Earl Wise, company controller, has indicated that poor overhead costing assignments may be distorting management's view of each product's cost and, therefore, the ability to know how to set selling prices. Earl has identified the following overhead activities: machining, inspection, and rework. The three activities, their costs, and practical capacities are as follows: Activity Cost Practical Capacity Machining $5,474,600 88,300 machine hours Inspection 3,628,800 44,800 inspection hours Rework 1,712,100 43,900 rework hours The consumption patterns of the two products are as follows:

Answer 1

	1.
	Particulars	special	super	Total
	Selling Price	$         203.00	$         396.00
	units	100000	27600	127600
	Machine Hours	49300	39000	88300
	Inspection hours	9200	35600	44800
	Rework Hours	7100	36800	43900
	Machine			$ 5,474,600.00
	Inspection			$ 3,628,800.00
	Rework			$ 1,712,100.00
	Total Cost			$10,815,500.00
	Answer -1
	Allocation of Total cost Plantwide rate base machine Hours	$6,038,552.10	$4,776,947.90	$10,815,500.00
	Per Hour machine rate	$         122.49	$         122.49
	Per Unit OH cost	$           60.39	$         173.08
	Answer -2
	Machine	$3,056,600.00	$2,418,000.00	$ 5,474,600.00
	Inspection	$   745,200.00	$2,883,600.00	$ 3,628,800.00
	Rework	$   276,900.00	$1,435,200.00	$ 1,712,100.00
	Total Cost	$4,078,700.00	$6,736,800.00	$10,815,500.00
	Per Unit OH Cost	$           40.79	$         244.09