Question

Company XYZ has 2 fixed price contracts for 2 different clients. The company has enough capacity for both contracts but is uncertain whether they will be profitable. Using the information below, a) calculate the activity-based costs and profits for each contract (this requires more than one step) and b) calculate the profit for each job using absorption costing, absorbing overheads using molding hours:

Enter all answers in number format without commas, decimals, or dollar signs.

Customer	AAA	BBB
Component Type	A999	B999
Contract Value ($)	$27,000	$100,000
Contract Quantity	1,000 unit	2,000 unit
Material cost/unit	$15	$20
Molding time/batch	5 hours	7.5 hours
Batch size	100 units	50 units

Annual Budgeted Overheads
Activity	Cost Driver	Cost Driver Volume/Yr	Cost Pool
Molding	Molding hours	2,000	$150,000
Inspection	Batches	150	$75,000
Prod. Mgmt.	Contracts	20	$125,000

(Calculate cost per unit of cost driver)
Activity	Cost pool (a)	Cost Driver/Yr (b)	Cost/Unit of Cost Driver (a)/(b)
Molding	$150,000	2,000	A. $  /molding hr.
Inspection	$75,000	150	B. $  /batch
Prod. Mgmt.	$125,000	20	C. $  /contract

(Calculate the cost drivers consumed by each contract)
Cost driver	Customer AAA	Customer BBB
Batches	D.	E.
Molding hours	F.	G.
Contracts	1	1

(Calculate the costs and profit for each contract)
	Contract AAA	Contract BBB
Selling price	$27,000	$100,000
Materials	H. $	I. $
Molding	J. $	K. $
Inspection	L. $	M. $
Management	N. $	O. $
Total cost	P.	Q.
Profit/(Loss)	($3,000)	$11,250

(Multiply (total annual overheads/annual molding hour) by materials and then overheads)
(b)	Contract AAA	Contract BBB
Selling price	$27,000	$100,000
Materials	R. $	S. $
Overheads	T. $	U. $
Total Cost	V. $	W. $
Profit/(Loss)	$3,250	$7,500

Answer 1

Cost per unit of cost driver :

Activity	Cost Pool	Cost Driver / Year	Cost per Unit of Cost Driver
Molding	$ 150,000	2,000 molding hours	$ 75 per molding hour
Inspection	75,000	150 batches	$ 500 per batch
Production Management	125,000	20 contracts	$ 6,250 per contract
	$ 350,000

Cost drivers consumed by each contract :

	Contract AAA	Contract BBB
Batches	10	40
Molding Hours	50	300
Contracts	1	1

Cost and Profit for each contract :

	Contract AAA	Contract BBB
Selling Price	$ 27,000	$ 100,000
Materials	15,000	40,000
Molding	3,750	22,500
Inspection	5,000	20,000
Management	6,250	6,250
Total Cost	30,000	88,750
Profit / ( Loss )	$ (3,000)	$ 11,250

b. Predetermined overhead rate = $ 350,000 / 2,000 molding hours = $ 175 per molding hour.

	Contract AAA	Contract BBB
Selling Price	$ 27,000	$ 100,000
Materials	15,000	40,000
Overhead	8,750	52,500
Total Cost	23,750	92,500
Profit / ( Loss )	$ 3,250	$ 7,500