Question

Exercise 4-9 Using ABC to assess prices LO P3

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		$	485,050		Number of batches	890
	Machining			366,275		Machine hours	8,050
	Setups			334,800		Number of setups	180
			$	1,186,125
Finishing	Welding		$	280,500		Welding hours	5,000
	Inspecting			275,625		Number of inspections	875
	Rework			38,000		Rework orders	190
			$	594,125
Support	Purchasing		$	172,800		Purchase orders	540
	Providing space			31,400		Number of units	5,700
	Providing utilities			76,330		Number of units	5,700
			$	280,530

   
Additional production information concerning its two product lines follows.

	Model 145			Model 212
Units produced		1,900			3,800
Welding hours		1,800			3,200
Batches		445			445
Number of inspections		475			400
Machine hours		2,750			5,300
Setups		90			90
Rework orders		90			100
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 $210 for Model 145 and $120 for Model 212.
3. If the market price for Model 145 is $713.07 and the market price for Model 212 is $411.47, determine the profit or loss per unit for each model.

Answer 1

1	Using ABC, compute the overhead cost per unit for each product line						Model 145		Model 212
	Activity	(1) Expected costs	Expected Activity (2)		3.Activity rate (1/2)		4.Activity driver incurred	5.Overhead assigned (3*4)	6.Activity driver incurred	7.Overhead assigned (3*6)
	Components
	Change over	485050	Number of batches	800	606.31	Per Batch	445	269809	445	269809
	Machining	366275	Machine hours	6000	61.05	Per machine hour	2750	167876	5300	323543
	setups	334800	Number of setups	120	2790.00	Per setup	90	251100	90	251100
	Finishing
	Welding	280500	weilding hours	3000	93.50	Per weilding hour	1800	168300	3200	299200
	Inspecting	275625	Number of inspections	700	393.75	Per inspection	475	187031	400	157500
	Rework	38000	Rework orders	300	126.67	Per rework order	90	11400	100	12667
	Support
	Purchasing	172800	Purchase of orders	450	384.00	Per purchase order	360	138240	180	69120
	Providing space	31400	Number of units	5000	6.28	per unit	1900	11932	3800	23864
	Providing utilities	76330	Number of units	5000	15.27	per unit	1900	29005	3800	58011
						Total overhead cost		1234694		1464813
						Total units produced		1900		3800
						Overhead cost per unit		649.84		385.48
2	Determine the total cost per unit for each product line if the direct labor and direct materials cost per unit
		Model 145	Model 212
	Material and labor per unit	210	120
	Overhead cost per unit	649.84	649.84
	Total cost per unit	859.84	769.84
3	If the market price for model 145 id $713.07 and the market price for model 212 is $411.47
		Model 145	Model 212
	Price per unit	713.07	411.47
	Cost per unit	859.84	769.84
	Loss per unit	-146.77	-358.37