Question

Mississippi Corporation creates a product that requires motors. They outsource the motors to two companies: Acme and Strauss. Acme completes 20% of the motors for $190 each. Strauss completes 80% of motors for $175 each. The total of 1.5 million motors were completed in the year, with the average company's contribution margin ration on completed chairs at 70%.

Activity	Cost	Drivers
Inspection	$2,000,000	Inspection Hours
Rework	$11,000,000	Rework Hours
Warranty	$33,400,000	Warranty Hours
Expediting	$1,500,000	# of Rush Orders
Lost Sales	$3,200,000

Drivers	Acme	Strauss	Total
Inspection Hours	300 hours	1,420 hours	1,720 hours
Rework Hours	165 hours	1,8000 hours	1,965 hours
Warranty Hours	210 hours	6,750 hours	6,960 hours
Expedited Orders	20 orders	125 orders	145 orders

1) Using Activity Based Costing and the information above, what is the product cost per unit for each company, Acme and Strauss.

2) Suppose Acme makes 100% of the motors at $180 each, for a five year deal with at least 1.2 million motors per year. Complete Activity Based Costing with this new information. Would this save the company money?

Answer 1

Answer		Acme	Strauss
	Units	300,000	1,200,000
	Cost per unit	190	175
	Total cost	57,000,000	210,000,000
	Activity Based Costing
	Activity	Acme in $	Strauss in $	Total in $
	Inspection	348,837	1,651,163	2,000,000
		(2000000*300/1720)	(2000000*1420/1720)
	Rework	923,664	10,076,336	11,000,000
		(11000000*165/1965)	(11000000*1800/1965)
	Warranty	1,007,759	32,392,241	33,400,000
		(33400000*210/6960)	(33400000*6750/6960)
	Expediting	206,897	1,293,103	1,500,000
		(1500000*20/145)	(1500000*125/145)
	Total	2,487,157	45,412,843
	Cost per unit	2487157/300000	45412843/1200000
		8.3	37.8