Alaire Corporation manufactures several different types of printed circuit boards; however, two of the boards account for the majority of the company's sales. The first of these boards, a television (TV) circuit board, has been a standard in the industry for several years. The market for this board is competitive and, therefore, price-sensitive. Alaire plans to sell 65,000 of the TV boards in 1999 at a price of $150 per unit. The second high-volume product, a personal computer (PC) circuit board, is a recent addition to Alaire's product line. Because the PC board incorporates the latest technology, it can be sold at a premium price; the 1999 plans include the sale of 40,000 PC boards at $300 per unit. 

Alaire's management group is meeting to discuss strategies for 1999, and the current topic of conversation is how to spend the sales and promotion dollars for next year. The sales manager believes that the market share for the TV board could be expanded by concentrating Alaire's promotional efforts in this area. In response to this suggestion, the production manager said, "Why don't you go after a bigger market for the PC board? The cost sheets show that the contribution from the PC board is more than double the contri- bution from the TV board. I know we get a premium price for the PC board; selling it should help overall profitability."

Alaire uses a conventional cost system, and the following data apply to the TV and PC boards:

Variable factory overhead is applied on the basis of direct labor hours. For 1999, variable factory overhead is budgeted at $1,120,000, and direct labor hours are estimated at 280,000. The hourly rates for machine time and direct labor are $10 and $14, respectively. Alaire applies a materials handling charge at 10 percent of materials cost; this materials handling charge is not included in variable factory overhead. Total 1999 expenditures for materials are budgeted at $1,060,000. 

Ed Welch, Alaire's controller, believes that before the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, it might be worthwhile to look at these products on the basis of the activities involved in their production. As Welch explained to the group, "Activity-based costing integrates, by using cost drivers, the cost of all activities into individual product costs rather than includ- ing these costs in overhead pools." Welch has prepared the following schedule to help the management group understand this concept. 

"Using this information," Welch explained, "we can calculate an activity-based cost for each TV board and each PC board and then compare it to the costs we have been using. The only cost that remains the same for both cost methods is the cost of direct materials. The cost drivers will assign the direct labor, machine time, and overhead costs in the current costing approach."

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TV Board PC Board Direct materials. $ 80 Direct labor. 1.5 hours $ 140 4.0 hours Machine time... 0.5 hours 1.5 hours