Question

Speed Company produces three types of DVD Analog, Digital, and Smart and operates at capacity. Data related to the three products are presented here: Analog Digital Smart Annual production in units 30,000 60,000 10,000 Direct material costs $600,000 $1,000,000 $800,000 Direct manufacturing labor costs $1,400,000 $1,200,000 $900,000 Direct manufacturing labor-hours 10,000 20,000 5,000 Machine-hours 10,000 15,000 7,000 Number of production runs 90 70 100 Inspection hours 11,000 16,000 14,000 Total manufacturing overhead costs are as follows: Total Cost Driver Machining costs $2,300,000 Machine-Hours Setup costs 1,850,000 Production-Runs Inspection costs 1,000,000 Inspection-Hours Speed’s simple costing system allocates overhead costs to its products based on manufacturing labor costs. Required: 1. Calculate the manufacturing overhead cost per unit for each product using the simple costing system. 2. a- Compute the manufacturing cost per unit for each product using the Activity-Based-Costing system. b- Given the following prices: Type Price/unit Analog $100 Digital $60 Smart $180 Use the cost per unit found in part 2-(a), What is the company’s break-even point in units, assuming that the given sales mix is maintained and that the total fixed costs are $5,445,000?

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Answer 1

1
		DVD Analog	Digital	Smart	Total		Overhead Costs:
	Direct Labor	1,400,000	1,200,000	900,000	3,500,000		Cost Pool	Costs
	Overhead Allocation	2,060,000	1,765,714	1,324,286			Machining	2,300,000
	(Direct labor*OH Rate)						Setup Cost	1,850,000
	Annual Production	30,000	60,000	10,000			Inspection	1,000,000
	Manufacturing OH Cost PU	68.67	29.43	132.43			Total	5,150,000
							Direct Labor Cost	3,500,000
							OH Rate per DLC	1.47
2A	Overhead Costs:	A		B	A/B
	Cost Pool	Costs	Activity	Activity Total	Activity Rate
	Machining	2,300,000	MH	32,000	71.9
	Setup Cost	1,850,000	Prod. Runs	260	7,115.4
	Inspection	1,000,000	Insp. Hours	41,000	24.4
	Allocation to Products:		Activity Usgae			Allocation (Activity usage* Rate)
	Cost Pool	Activity Rate	DVD Analog	Digital	Smart	DVD Analog	Digital	Smart
	Machining	71.9	10,000	15,000	7,000	718,750.0	1,078,125.0	503,125.0
	Setup Cost	7,115.4	90	70	100	640,384.6	498,076.9	711,538.5
	Inspection	24.4	11,000	16,000	14,000	268,292.7	390,243.9	341,463.4
					Total	1,627,427.3	1,966,445.8	1,556,126.9
					Units	30,000	60000	10,000
					Manufacturing OH Cost PU	54.25	32.77	155.61
2B		DVD Analog	Digital	Smart
	Direct Material	600,000	1,000,000	800,000
	Direct Labor	1,400,000	1,200,000	900,000
					Total
	Annual Production	30,000	60,000	10,000	100,000
	Direct Material PU	20.00	16.67	80.00
	Direct Labor PU	46.67	20.00	90.00
	Sale Price	100.00	60.00	180.00
	Less:
	Direct Material PU	20.00	16.67	80.00
	Direct Labor PU	46.67	20.00	90.00
	Contribution Margin PU	33.33	23.33	10.00
	Sales Mix	30.0%	60.0%	10.0%	(Sales Units/Total Units)
	Contribution Margin W aver	10.00	14.00	1.00	25.00
	Fixed Cost	5,445,000
	Contribution Margin W aver	25.00
	Break Even Units	217,800