Question

Fleet Street Inc., a manufacturer of high-fashion clothing for women, is located in South London in the UK. Its product line consists of trousers (25%), skirts (33%), dresses (14%), and other (28%). Fleet Street Inc. has been using a volume-based rate to assign overhead to each product; the rate it uses is £2.61 per unit produced. The results for the trousers line, using the volume-based approach, are as follows: Number of units produced 13,000   Price (all figures in £) 29.23   Total revenue 379,990   Direct materials 62,500   Direct labor 208,600   Overhead (volume-based) 33,930   Total product cost 305,030   Nonmanufacturing expenses 57,100   Total cost 362,130   Profit margin for trousers 17,860

Recently, it has conducted a further analysis of the trousers line of product, using ABC. In the study, eight activities were identified, and direct labor was assigned to the activities. The total conversion cost (labor and overhead) for the eight activities, after allocation to the trousers line, is as follows:

Pattern cutting	£	39,470
Grading		33,700
Lay planning		32,800
Sewing		37,800
Finishing		25,000
Inspection		11,300
Boxing up		6,100
Storage		12,200

Determine the profit margin for trousers using ABC. Please show all calculations step by step

Answer 1

Product Margin statement
	Units	Rate	Amount
Sales Revenue	13,000	29.23	379,990
Less: Product Cost
Direct Material			62,500
Conversion Cost*			198,370
Total Product Cost (ABC)			260,870
Gross Margin			119,120
Less: Non manufacturing expenses			57,100
Profit margin for trousers			£ 62,020.00

Pattern cutting	£	39,470
Grading		33,700
Lay planning		32,800
Sewing		37,800
Finishing		25,000
Inspection		11,300
Boxing up		6,100
Storage		12,200
Total Conversion Cost*		198,370