Question

Come-On-In Manufacturing produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labor dollars. For 2010, Come-On-In compiled the following data for the two products:

                                                                         Deluxe        Standard

Sales units                                                      $50,000         $400,000

Sales price per unit                                         $650.00           $475.00

Direct material and labor costs per unit         $180.00           $130.00

Manufacturing support costs per unit             $ 80.00           $120.00

Last year, Come-On-In Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 2010:

Activity              Cost Driver                 Cost              Total        Deluxe       Standard

Setups              # of setups                     $ 500,000        500           400            100

Machine-related # of machine hours     $44,000,000   600,000    300,000     300,000

Packing               # of shipments       $ 5,000,000   250,000      50,000     200,000

Required:

a.   Using the current system, what is the estimated

      1.   total cost of manufacturing one unit for each type of door?

      2.   profit per unit for each type of door?

b.   Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe door ($80 per unit) than the standard door ($120 per unit). What is a likely explanation for this?

c.   Review the machine-related costs above. What is a likely explanation for machine-related costs being so high? What might explain why total machining hours for the deluxe doors (300,000 hours) are the same as for the standard doors (300,000 hours)?

d.   Using the activity-based costing data presented above,

      1.   compute the cost-driver rate for each overhead activity.

      2.   compute the revised manufacturing overhead cost per unit for each type of entry door.

      3.    compute the revised total cost to manufacture one unit of each type of entry door.

e.   Is the deluxe door as profitable as the original data estimated? Why or why not?

f.    What considerations need to be examined when determining a sales mix strategy?

Answer 1