Question

The following data are for the two products produced by Tadros Company. Direct materials Direct labor hours Machine hours Batches Volume Engineering modifications Number of customers Market price Product A $20 per unit 0.5 DLH per unit 0.4 MH per unit 200 batches 16,000 units 14 modifications 500 customers $50 per unit Product B $30 per unit 1.5 DLH per unit 1.2 MH per unit 360 batches 3,600 units 86 modifications 400 customers $200 per unit The company's direct labor rate is $32 per direct labor hour (DLH). Additional information follows. Indirect manufacturing Engineering support Electricity Setup costs Nonmanufacturing Customer service Costs Driver $ 53,600 Engineering modifications 42,880 Machine hours 171,520 Batches 81,000 Number of customers Required: (Round your per unit cost answers to 2 decimal places and other answers to nearest whole number. Loss amounts should be indicated with minus sign.)

Answer 1

1) Direct Labor hours for product A = 16,000 units*0.5 DLH per unit = 8,000 hrs

Direct Labor hours for product B = 3,600 units*1.5 DLH per unit = 5,400 hrs

Overhead costs = Engineering support+Electricity+Setup costs

= $53,600+$43,880+$171,520= $268,000

Calculation of manufacturing cost per unit using the plantwide overhead rate based on direct labor hours.

Overhead costs (A)	$268,000	(A/B) $20	per direct labor hour
Direct Labor Hours (B)	13,400hrs
Overhead Assigned	Activity Driver (C)	Plantwide OH rate (D)	Total Overhead Cost (E = C*D)	Units Produced (F)	OH Cost per unit (E/F)
Product A	8,000	$20	$160,000	16,000	$10
Product B	5,400	$20	$108,000	3,600	$30
Total manufacturing cost per unit	Product A	Product B
Direct Material cost per unit	$20	$30
Direct Labor cost per unit	(0.50*$32) = $16	(1.50*$32) = $48
Overhead cost per unit	$10	$30
Total manufacturing cost per unit	$46	$108

1.2)

1.2 Calculation of gross profit per unit
	Product A	Product B
Market price	$52	$200
Manufacturing cost per unit	($46)	($108)
Gross profit per unit	$6	$92

2.1)

Calculation of gross profit generated by each customer of Product A and Product B using the plantwide overhead rate

	Product A	Product B
Gross profit per unit (A)	$6	$92
Units purchased per customer (B)	(16,000/500) = 32	(3,600/400) = 9
Gross profit per customer (A*B)	$192	$828

2.2)

Calculation of cost of providing customer service to each customer

2.2
Customer service costs (c)	$81,000	(c/d) $90	per customer
No. of customers (d)	900

Is the gross profit adequate for each customer of Product A and B using the plantwide overhead rate?

	Product A	Product B
Gross profit per customer	$192	$828
Customer service cost per customer	($90)	($90)
Profit (loss) per customer	$102	$738
Is the profit adequate?	Yes	Yes

3.1)

Calculation of manufacturing cost per unit of each product line using ABC.

Engineering Support
Cost (A)	$53,600	(A/B) $536	per modification
Engineering modifications (B)	(14+86) = 100
Electricity
Costs	$42,880	$4.00	per machine hour
Machine hours	10,720
Setup
Costs	$171,520	$306,29	per batch
Batches	(200+360) = 560

Overhead Assigned	Activity Driver	Activity rate	Total Overhead Cost
Product A
Engineering support	14	Modifications	$536	per modification	$7,504
Electricity	6,400	Machine hours	$4.00	per machine hour	$25,600
Setup	200	batches	$306,29	per batch	$61,257

Total Overhead costs (A)	$61,257
Units Produced (B)	16,000 units
Overhead cost per unit (A/B)	$3.83

Product B
Engineering support	86	Modifications	$536	per modification	$46,096
Electricity	4,320	Machine hours	$4.00	per machine hour	$17,280
Setup	360	batches	$306,29	per batch	$110,263

Total Overhead Costs (A)	$110,263
Units produced (B)	3,600units
Overhea cost per unit (A/B)	$30.63

Total manufacturing costs	Product A	Product B
Direct Materials per unit	$20	$30
Direct Labor per unit	$16	$48
Overhead per unit	$3.83	$30.63
Total manufacturing cost per unit	$39.83	$108.63

3.2)

3.2 Calculation of gross profit per unit
	Product A	Product B
Market price	50	200
Manufacturing cost per unit	(39.83)	(108.63)
Gross Profit per unit	$10.17	$91.37

4.1 Gross profit generated by each customer of Product A and Product B using ABC

	Product A	Product B
Gross Profit per unit	10.17	91.37
Units purchased per customer	32	9
Gross profit (loss) per customer	325.44	822.33

4.2 Is the gross profit adequate for each customer of Product A and B using ABC?

	Product A	Product B
Gross profit (loss) per customer	325.44	822.33
Customer service cost per customer	(90)	(90)
Profit (loss) per customer	235.44	(732.33)
Is the profit adequate using ABC?	Yes	Yes