Product cost distortions The Manhattan Company manufactures two models of LO 1, 3, 4, 5 compact disc players: a deluxe model and a regular model. The company has manufactured the regular model for years; the deluxe model was introduced re¬ cently to tap a new segment of the market. Since the introduction of the deluxe model, the company's profits have steadily declined and management has be¬ come increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.

The current cost accounting system allocates manufacturing support costs to the two products on the basis of direct labor hours. For 2000, the company has estimated that it will incur $1 million in manufacturing support cost and produce 5,000 units of the deluxe model and 40,000 units of the regular model.

The deluxe model requires two hours of direct labor and the regular model re¬ quires one hour. Material and labor costs per unit and selling price per unit are as follows:

REQUIRED

(a) Compute the manufacturing support cost driver rate for 2000.

(b) Determine the cost to manufacture one unit of each model.
The company has decided to trace manufacturing support costs to four activ¬ ities. The amount of manufacturing support cost traceable to the four activities for 2000 are given below:

(c) Using the activity-based costing data presented above, compute the total cost to manufacture one unit of each model.

(d) Compare the manufacturing activity resources demanded per unit of the reg¬ ular model and per unit of the deluxe model. Why did the old costing sys¬ tem undercost the deluxe model?

(e) Is the deluxe model as profitable as the company thinks it is under the old costing system? Explain.

(f) What should Manhattan Company do to improve its profitability?
LO 1, 3, 4, 5

Transcribed Image Text:

ITEM DELUXE REGULAR Direct materials cost $ 45 $30 Direct labor cost $ 20 $10 Selling price $140 $80