In: Accounting
CASE STUDY 4-1: TRADITIONAL versus ABC COSTING
Top-Line Suitcases manufactures three lines of suitcases from basic to deluxe to heavy-duty. The company uses a traditional job-order costing system with manufacturing overhead allocated based on direct labor hours.
The company has been losing market share. Upon analysis, the basic model was overpriced compared to competitors. Competitors were selling basic suitcase for $115, yet this is the cost of the basic suitcase for Top-Line. The company president said “how can our competitors sell for this price? What are we doing wrong?” The new CFO anxiously responded “I think your job-order costing system is outdated and distorting product costs.” The president requested an analysis of alternative product-costing systems.
In her analysis, the CFO compared the traditional job-order costing system with an activity-based costing system. She determined three manufacturing overhead activity cost pools:
Cost Pool Cost Driver Product Line Breakdown
Basic Deluxe Heavy-Duty
Purchasing # of purchase orders 48% 10% 42%
Maintenance # of machine hours 40% 12% 48%
Inspection # of inspections 45% 10% 45%
REQUIRED:
4. Assume you are the CFO. Write a memo to the company president explaining your analysis including your recommendation for target pricing.
Basic Model | Deluxe Model | Heavy Duty Model | |
Annual Sales (in units) | 20,000 | 1,000 | 10,000 |
Selling Price per unit | $120 | $215 | $280 |
Product Costs: | |||
Raw Material | $10 | $25 | $42 |
Direct Labor ($20/hour) | |||
Manufacturing Overhead | |||
Total Product Costs | |||
Direct Labor Budget (in hours) | 10,000 hours | 800 hours | 10,000 hours |
Manufacturing Overhead Budget: | |||
Purchasing | $257,000 | ||
Maintenance | $1,780,000 | ||
Inspections | $1,915,000 | ||
$3,952,000 |
please help me solve for my assignment is due in 2 hours time.thank you