Question

Way Cool produces two different models of air conditioners. The company produces the mechanical systems in their components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow.

Process	Activity	Overhead Cost				Driver	Quantity
Components	Changeover		$	476,150		Number of batches	890
	Machining			399,040		Machine hours	8,600
	Setups			183,500		Number of setups	100
			$	1,058,690
Finishing	Welding		$	286,730		Welding hours	5,300
	Inspecting			306,525		Number of inspections	915
	Rework			50,000		Rework orders	200
			$	643,255
Support	Purchasing		$	183,600		Purchase orders	540
	Providing space			31,800		Number of units	7,800
	Providing utilities			114,840		Number of units	7,800
			$	330,240

   
Additional production information concerning its two product lines follows.

	Model 145			Model 212
Units produced		2,600			5,200
Welding hours		1,400			3,900
Batches		445			445
Number of inspections		515			400
Machine hours		3,250			5,350
Setups		50			50
Rework orders		110			90
Purchase orders		360			180

  
Required:
1. Using ABC, compute the overhead cost per unit for each product line.
2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $200 for Model 145 and $112 for Model 212.
3. If the market price for Model 145 is $557.48 and the market price for Model 212 is $324.82, determine the profit or loss per unit for each model.

Answer 1

• All working forms part of the answer
• Workings

Calculation of Activity Rates for allocation of Overheads

Process	Activity	Overhead Cost	Driver	Quantity	Activity Rates per Driver
Components	Changeover	$                476,150.00	Number of batches	890	$                 535.00
	Machining	$                399,040.00	Machine hours	8,600	$                   46.40
	Setups	$                183,500.00	Number of setups	100	$             1,835.00
		$            1,058,690.00
Finishing	Welding	$                286,730.00	Welding hours	5,300	$                   54.10
	Inspecting	$                306,525.00	Number of inspections	915	$                 335.00
	Rework	$                  50,000.00	Rework orders	200	$                 250.00
		$                643,255.00
Support	Purchasing	$                183,600.00	Purchase orders	540	$                 340.00
	Providing space & Providing Utilities	$                146,640.00	Number of units	7,800	$                   18.80
		$                330,240.00

• Requirement 1, along with working

Allocation to Model 145
		Activity Rates per Driver	No. of drivers	Cost Allocated
Components	Changeover	$                        535.00	445	$       238,075.00
	Machining	$                           46.40	3,250	$       150,800.00
	Setups	$                     1,835.00	50	$         91,750.00
Finishing	Welding	$                           54.10	1,400	$         75,740.00
	Inspecting	$                        335.00	515	$       172,525.00
	Rework	$                        250.00	110	$         27,500.00
Support	Purchasing	$                        340.00	360	$       122,400.00
	Providing space & Providing Utilities	$                           18.80	2,600	$         48,880.00
Total Overhead allocated				$       927,670.00
Total Units				2600
Overhead cost per unit Model 145				$               356.80

Allocation to Model 212
		Activity Rates per Driver	No. of drivers	Cost Allocated
Components	Changeover	$                        535.00	445	$       238,075.00
	Machining	$                           46.40	5,350	$       248,240.00
	Setups	$                     1,835.00	50	$         91,750.00
Finishing	Welding	$                           54.10	3,900	$       210,990.00
	Inspecting	$                        335.00	400	$       134,000.00
	Rework	$                        250.00	90	$         22,500.00
Support	Purchasing	$                        340.00	180	$         61,200.00
	Providing space & Providing Utilities	$                           18.80	5,200	$         97,760.00
Total Overhead allocated				$   1,104,515.00
Total Units				5200
Overhead cost per unit Model 212				$               212.41

• Requirement 2

	Model 145	Model 212
Direct Material & Labor per unit	$                                         200.00	$                        112.00
Overhead cost allocated per unit	$                                         356.80	$                        212.41
Total cost per unit	$                                         556.80	$                        324.41

• Requirement 3

	Model 145	Model 212
Market Price	$                                         557.48	$                        324.82
Total cost per unit	$                                         556.80	$                        324.41
Profit (Loss) per unit	$                                              0.68	$                             0.41