Altus Company produces and sells two products, Hinkels and Quirts. During the coming year, its normal activity level of production is 400,000 cases of Hinkels and 100,000 cases of Quirts. Each case of Hinkels requires 0.6 DLH, and each case of Quirts requires 0.8 DLH. Altus has been budgeting and applying its factory overhead on the basis of 320,000 standard direct labor hours (DLH). Based on this activity level, Altus has computed its estimated total variable factory costs to be $1,280,000 and its total fixed factory overhead costs to be $1,520,000. Its standard costs for direct labor and direct materials for a case of each product are as follows:

Hinkels Quirts Direct labor $6 $ 8 Direct materials 5 10 At this activity level, Altus has no nonfactory variable costs, and it estimates its nonfactory fixed costs to be $2,000,000. Altus expects to sell each case of Hinkels for $21 and each case of Quirts for $30, and desires to earn a pretax income of $300,000.

Required: (1) Compute Altus Company's

(a) variable factory overhead cost per direct labor hour and

(b) fixed factory overhead cost per direct labor hour.

(2) Compute Altus Company's total cost per case of

(a) Hinkels and (b)

Quirts.

(3) Compute Altus Company’s break-even point in “units” and in cases of Hinkels and Quirts.

(4) Compute the volume (in “units” and in cases of Hinkels and Quirts) that Altus Company must produce and sell to achieve its desired pretax income.

Now suppose that Altus Company uses activity-based costing to budget and apply its factory overhead at its normal activity level (400,000 cases of Hinkels and 100,000 cases of Quirts). Based on an analysis by its management accountants and engineers, Altus has identified several activity pools and their related cost drivers. It also has recognized that $1,000,000 of factory overhead costs that it previously considered to be fixed costs are variable costs. Thus, it traced its $2,280,000 total variable factory overhead costs to these cost pools and computed a rate per driver for each activity pool as follows:

Total Rate per Traceable Driver Driver Activity Pool/Cost Driver Costs Units Unit ————————— a a 0 es ee eee Purchase related/Purchase orders (PO) $ 440,000 200,000 $2.20/PO Material move related/Material moves (MM) 615,000 150,000 4.10/MM Machine related/Machine hours (MH) 265,000 100,000 2.65/MH Direct labor related/Direct labor hours (DLH) 960,000 320,000 3.00/DL Total variable (traceable) costs $2,280,000 Altus has determined that at its normal activity level, Hinkels and Quirts will use the folSr)
lowing number of driver units in each activity pool:
re ee ol Number of Driver Units Cost Driver EE ee Hinkels Quirts

a) ee es Pea:
PO 150,000 50,000 MM 110,000 40,000 MH 60,000 40,000 DLH 240,000 80,000 Altus has $520,000 fixed factory overheads that are not associated with an identifiable cost driver. It assigns these costs to cases based on 320,000 direct labor hours.

Required: (5) Using activity-based costing, determine Altus Company's total factory overhead cost per case of

(a) Hinkels and

(b) Quirts.
(6) Using activity-based costing, compute Altus Company's total cost per case of

(a) Hinkels and

(b) Quirts.
(7) Using activity-based costing, compute Altus Company's break-even point in “units” and in cases of Hinkels and Quirts.
(8) Using activity-based costing, compute the volume (in “units” and in cases of Hinkels and Quirts) that Altus Company must produce and sell to achieve its desired pretax income.
(9) Explain why Altus Company's total cost per case in (6) differs from that in (2).
(10) Explain why Altus Company's volumes needed to reach its break-even point and earn its desired pretax income in (7) and (8) are lower than the volumes needed to reach its break-even point and earn its desired pretax income in (3) and (4). LKY-1