Question

Harbour Company makes two models of electronic tablets, the Home and the Work. Basic production information follows:
   

	Home			Work
Direct materials cost per unit	$	44		$	71
Direct labor cost per unit		23			35
Sales price per unit		369			573
Expected production per month		740	units		410	units

    

Harbour has monthly overhead of $187,410, which is divided into the following cost pools:

Setup costs	$	86,110
Quality control		58,800
Maintenance		42,500
Total	$	187,410

        

The company has also compiled the following information about the chosen cost drivers:      

	Home	Work	Total
Number of setups	38	71	109
Number of inspections	310	390	700
Number of machine hours	1,100	1,400	2,500

1. Compare the gross margin of each product under the traditional system and ABC. (Round your answers to 2 decimal places.)

	Home	Work
Gross Margin (Traditional)
Gross Margin (ABC)

Answer 1

Firstly we allocate overhead costs using traditional method
Overhead	187410
Machine hours	2500
overhead per machine hour	74.96
allocated to
	Home model	Work model
Machine hours(a)	1100	1400
Rate (b)	74.96	74.96
overheads allocated(a*b)	82460	104950
Units	740	410
Overhead cost per unit	$                        111.43	$        255.97
Product costs
	Home model	Work model
Direct material	$                           44.00	$          71.00
Direct labor	$                           23.00	$          35.00
overhead costs	$                        111.43	$        255.97
total unit costs	$                        178.43	$        361.97
	Home model	Work model
sale price	$                        369.00	$        573.00
Unit costs	$                        178.43	$        361.97
Gross profit	$                        190.57	$        211.03
now using ABC method
Activity	Costs	Units	Cost per activity
setup	86110	109	790
quality control	58800	700	84
maintenance	42500	2500	17
allocated to
	Setup		Qaulity control		Maintenance
Number	38	71	310	390	1100	1400
Rate (b)	790	790	84	84	17	17
overheads allocated(a*b)	30020	56090	26040	32760	18700	23800
so we have
	Home model	Work model
Overheads	74760	112650
Units	740	410
Overhead cost per unit	$                        101.03	$        274.76
Product costs
	Home model	Work model
Direct material	$                           44.00	$          71.00
Direct labor	$                           23.00	$          35.00
overhead costs	$                        101.03	$        274.76
total unit costs	$                        168.03	$        380.76
	Home model	Work model
sale price	$                        369.00	$        573.00
Unit costs	$                        168.03	$        380.76
Gross profit	$                        200.97	$        192.24
So your answer
	Home	Work
Traditional	$                        190.57	$        211.03
ABC	$                        200.97	$        192.24