Question

I need help with all 3 Required questions.

Analytical Thinking [LO4-2, LO4-3, LO4-4] Two dollars of gross margin per briefcase? That's ridiculousr roared Roy Thurmond, president of First-Line Cases, Inc. "Why do we go on producing those standard briefcases when we're able to make over $12 per unit on our specialty items? Maybe it's time to get out of the standard line and focus the whole plant on specialty work. Mr. Thurmond was referring to a summary of unit costs and revenues that he had just received from the company's accounting department Standard Briefcases $24.45 22.45 Specialty Briefcases Selling price per unit Unit product cost $41.90 29.82 S 2.00 Gross margin per unit 12.08 FirstLine Cases produces briefcases from leather, fabric, and synthetic materials in a single plant. The basic product is a standard briefcase that is made from leather lined with fabric. The standard briefcase is a high-quality item and has sold well for many years Last year, the company decided to expand its product line and produce specialty briefcases for special orders. These briëfcases difer from standard To reduce labor costs on the specialty briefcases, automated machines do most of the cutting and stitching These machines are used to a much lesser degree in the production of standard briefcases. at they vary in size, ey contain the finest leather and synthetic materials, and they are imprinted with the buyer s name "I agree that the specialty business is looking better and better" replied Beth Mersey, the company's marketing manager. "And there seems to be plenty of demand out there, particularty because the competition hasn't been able to touch our price. Did you know that Velsun Company, our biggest competitor, charges over $48 a unit for its specialty items? Now that's what I call gouging the customer A breakdown of the manufacturing cost for each of FirstLine Cases products is given below Speciality Briefcases 3,000 Standard Briefcases 15,000 Units produced each month Direct materials: Leather $ 740 1.40 $11.40 1.10 6.40 1890 Fabric Synthetic Total materials B.80 Direct labor (0.50 DLH and 0.40 DLH $11.40 per DLH) Manufacturing overhead (0.5 DLH and 0.4 DLH$15.90 per DLH) 5.70 4.56 7.95 $ 22.45 6.36 $29.82 Total cost per unit Manufacturing overhead is applied to products on the basis of direct labor-hours. The rate of $15.90 per hour was determined by dividing the total manufacturing overhead cost for a month by the direct labor-hours $138 330 8,700 DLHS Manufacturing overhead Direct labor-hours $15.90 per DLH Predetermined overhead rate The following additional information is available about the company and its products: a. Standard briefcases are produced in batches of 1,000 units, and specialty briefcases are produced in batches of 100 units Thus, the company does 15 setups for the standard items each month and 30 setups for the specialty items. A setup for the standard items requires one hour, whereas a setup for the specialty items requires two hours b. All briefcases are inspected to ensure that quality standards are met. Each month a total of 200 hours is spent inspecting the standard briefcases and 300 hours is spent inspecting the specialty briefcases c. A standard briefcase requires 0.4 hours of machine time, and a specialty briefcase requires 1.1 hours of machine time. d. The company is considering the use of activity-based costing as an altemative to its traditional costing system for computing unit product costs. The activity-based costing system has already been designed and costs have been alocated to the activity cost pools. The activity cost pools and activity measures are detailed below: Estimated Overhead Cost 12,000 21.250 8,250 27,230 Activity Cost Pool Purchasing Material handling Production orders and setups Inspection Activity Measure Number of orders Number of receipts Setup-hours Inspection-hours Frame assembly Machine-related Assembly-hours Machine-hours 13.800 55.800 138,330 Expected Activity Speciality Briefcases Standard Briefcases Acivity Measure Number of orders Total 40 60 55 Leather 15 25 160 Fabric Synthetic material Number of receipts: 160 90 115 75 15 25 220 Leather Fabric Synthetic material Setup-hours Inspecion-hours Assembly-hours Machine-hours 90 220 7 200 640 ? 300 740 500 1,380 Required: 1. Using activity-based costing, determine the amount of manufacturing overhead cost that would be assigned to each standard briefcase and each specialty briefcase. 2. Using the data computed in part (1) above and other data from the case as needed, determine the unit product cost of each product line from the perspective of the activity-based costing system. 3. Within the limitations of the data that have been provided, evaluate the president's concen about the profitability of the two product lines. Complete this question by entering your answers in the tabs below. 823 828

Answer 1

					Standard Briefcase		Speciality Briefcase
Activity cost pool	Cost		Activity driver A	Activity rate R	Activity B	Estimated cost B*R	Activity C	Estimated cost C*R
Purchasing	$12,000	No. of orders	300	$40.00	100	$4,000.00	200	$8,000.00
		(55+85+160)
Material Handling	21250	No. of receipts	425	$50.00	165	$8,250	260	$13,000
Production orders & setup	8250	Setup hours	45	$183.33	15	$2,750	30	$5,500
Inspection	27230	Inspection	500	$54.46	200	$10,892	300	$16,338
Frame assembly	13800	Assembly Hours	1380	$10.00	640	$6,400	740	$7,400
Machine Related	55800	Machine hours	9300	$6.00	6000	$36,000	3300	$19,800
	$138,330	(15000*.4)+(3000*1.1)				$68,292		$70,038
					No. of briefcase	15000		1000
		answer 1	Manufacturing overhead cost per unit			$4.55		$70.04
ans 2	Standard Briefcase	Speciality Briefcase
Unit product cost
Direct Material	$8.80	18.9
Labor	5.7	4.56
Manufacturing overhead	$4.55	$70.04
Unit product cost	$19.05	$93.50
ans 3
Activity based costing	Standard Briefcase	Speciality Briefcase
Selling price	24.45	41.9
Unit product cost	$19.05	$93.50
Profit	$5.40	($51.60)
Selling price	24.45	41.9
Unit product cost	22.45	29.82
Profit	$2.00	$12.08
So as per Abc analysis we can see that Standard Briefcase has $5.4 per unit profit and
speciality briefcase is at loss of $51.6 which is an area of conscern.
This shows that Prseident must say his management to workout on speciality briefcase not standard briefcase
If any doubt please comment