Question

The following data are for the two products produced by Tadros Company PROBLEM SETA Product A Product B Direct materials. Direct labor hours... Machine hours Batches Volume Engineering modifications .. Number of customers...... Market price..... $15 per unit 0.3 DLH per unit 0.1 MH per unit 125 batches 10,000 units 12 modifications 500 customers $30 per unit $24 per unit 1.6 DLH per unit 1.2 MH per unit 225 batches 2.000 units 58 modifications 400 customers $120 per unit Problem 17-1A Comparing costs using ABC with the plantwide overhead rate A1 A2 P1 P3 The company's direct labor rate is $20 per direct labor hour (DLH). Additional information follows. Costs Driver Indirect manufacturing Engineering support $24,500 Engineering modifications Electricity 34,000 Machine hours Setup costs 52,500 Batches Nonmanufacturing Customer service........... 81,000 Number of customers Required 1. Compute the manufacturing cost per unit using the plantwide overhead rate based on direct laborCheck Product $26 37 hours. What is the gross profit per unit? 2. How much gross profit is generated by each customer of Product A using the plantwide overhead rate? How much gross profit is generated by each customer of Product B using the plantwide overhead rate? 31 Product A52430 3. What is the cost of providing customer service to each customer? 4. Determine the manufacturing cost per unit of each product line using ABC. What is the gross profit per unit? 5. How much gross profit is generated by each customer of Product A using ABC? How much gross profit is generated by each customer of Product B using ABC? Is the gross profit per customer adequate? Is the gross profit per customer for each of these products greater than the cost of providing customer service?

Answer 1

Tadros Company Requirement 1 Plantwide Overhead rate = Overhead costs / Direct labor hours = 111000 / 6200 = 17.90 per DLH Overhead Assigned Product A Product B Activity Plantwide Total Units Ohd. Cost Driver OH rate Ohd. Cost Produced per unit 3000 17. 9 5 3700 10000 5.37 3200 17.9 57280 2000 28.64 Total manufacturing cost per unit: Direct material cost per unit Direct labor cost per unit Overhead cost per unit Total manufacturing cost Product A Product B 15 24 6 32 5.37 28.64 26.37 84.64 Gross Profit per unit Market price Manufacturing cost per unit Gross profit per unit Product A Product B 30 120 -26.37 -84.64 3.63 35.36 Requirement 2 Gross profit per unit Units purchased per customer Gross profit per customer Product A Product B 3.63 35.36 205 72.60 176.80 cost of providing customer service to each customer = = Customer service costs / Number of customers = 81000 / 900 = 90 per customer Gross profit adequate for each customer of Product A and B using the plantwide overhead rate Gross profit per customer Customer service cost percustomer Profit (loss) per customer Is the profit adequate? Product A Product B 72.60 176.80 90 90 -17.40 86.80 No Yes

Requirement 3 Manufacturing cost per unit of each product line using ABC. Overhead costs / Number ofmodifications = 24500 / 70 = 350 per modification Electricity Overhead costs / Number ofMachine Hours = 34000 / 3400 = 10 per machine hour Setup Overhead costs / Number ofBatches = 52500 / 350 = 150 Batches

Total Ohd. Cost Activity Driver Activity Driver Overhead Assigned Product A Engineering support 12 Electricity 1000 Setup 125 Total overhead costs assigned Total units produced Overhead cost per unit modifications machine hours batches 350 10 150 per modifications per machine hours per batch 4200 10000 18750 32950 10000 3.30 Product B Engineering support 58 modifications Electricity 2400 machine hours Setup 225 batches Total overhead costs assigned Total units produced Overhead cost per unit 350 10 150 per modifications per machine hours per batch 20300 24000 33750 78050 2000 39.03 Product A Total manufacturing costs Direct material cost per unit Direct labor cost per unit Overhead cost per unit Total manufacturing cost Product B 24 32 39.03 95.03 3.30 24.30 Product A 30 Market price Manufacturing cost per unit Gross profit(loss) per unit Product B 120 -95.03 24.98 -24.30 5.71 Gross profit is generated by each customer of Product A and Product B using ABC? Product B 24.98 Gross profit(loss) per unit Units purchased per customer Gross profit per customer Product A 5.71 20 114.10 124.88 gross profit adequate for each customer of Product A and B using ABC? Product A 114.10 90 24.10 Yes Product B 124.88 90 Gross profit per customer Customer service cost percustom Profit (loss) per customer Is the profit adequate? 34.88 Yes