Fresco, Inc., produces elite (priced at $300) and supreme juicers (priced at $180).

Recently, Fresco has been losing market share with its supreme juicers because of competitors offering juicers with the same quality and features but at a lower price. A careful market study revealed that if Fresco could reduce the price of its supreme juicer to $170, it would regain its former share of the market. Management, however, is convinced that any price reduction must be accompanied by a cost reduction of the same amount so that per-unit profitability is not affected. Charles McManus, company controller, has indicated that poor overhead costing assignments may be distorting management’s view of each product’s cost and, therefore, the ability to know how to set selling prices. Charles has identified the following overhead activities: assembly, inspection, and rework. The three activities, their costs, and practical capacities are as follows:

Required:
1. Calculate the unit overhead cost of the supreme juicer using assembly hours to assign overhead costs. Now, repeat the calculation using ABC to assign overhead costs. Did improving the accuracy of cost assignments solve Fresco’s competitive problem? What did it reveal?
2. Now, assume that in addition to improving the accuracy of cost assignments, Charles observes that defective supplier components are the root cause of both the inspection and rework activities. Suppose further that Fresco has found a new supplier that provides higher-quality components such that inspection and rework costs are reduced by 50 percent. Now, calculate the cost of each product (assuming that inspection and rework time are also reduced by 50 percent) using ABC. The relative consumption patterns also remain the same. Comment on the difference between ABC and ABM.LO1

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Activity Cost Practical Capacity Assembly $2,700,000 90,000 assembly hours Inspection Rework 1,800,000 900,000 45,000 inspection hours 45,000 rework hours The consumption patterns of the two products are as follows: Supreme Elite Units 100,000 30,000 Assembly hours 50,000 40,000 Inspection hours 10,000 35,000 Rework hours 7,500 37,500 Fresco assigns overhead costs to the two products using a plantwide rate based on direct labor (assembly) hours.