1 Question 4: 18 marks 2 3 Bespoke Furniture Assemblers Inc. (BFAI) manufactures bedroom furniture in sets (a set includes a 4 dresser two queen-size beds, and one bedside table) for use in motels and hotels. BFA has three 5 customer groups which it calls the value, quality and luxury groups. The value products are targeted to 6 low-price motels that are looking for simple furniture, while the luxury furniture is targeted to the very 7 best hotels. The value line is attractive to a variety of hotels and motels that appreciate the combination 8 of quality and value. Currently there has been a small increase in the quality and value lines, and an 9 appreciable increase in demand in the luxury line, reflecting cyclical changes in the marketplace. 10 11 Luxury hotels are now in more demand for business travel, while a few years ago, the value segment 12 was the most popular for business travelers. BF Al wants to be able to respond to the increased 13 demand with increase production but worries about the increased production cost and about price setting 14 as its mix of customers and production change. BFA has used a volume-based overhead allocation rate 15 based on direct labour hours for some time. 16 17 Direct labour cost is $15 per hour 18 Budgeted Cost Cost Driver 20 Materials handling $ 350,200 Number of parts 21 Product scheduling 162,000 Number of production orders 22 Setup labour 215,000 Number of setups 23 Automated machinery 1,785,000 Machine hours Finishing 620.250 Direct'labour hours 25 Pack and ship 292,325 Number of orders shipped 26 $ 3,424,775 27 General, selling and 28 administrative costs 4,950,000 29 30 The budgeted production data for the three product lines follow: 31 32 Product Lines Value Quality Luxury 33 Sets produced 15,100 4,900 600 34 Price $660 $900 $1,150 Direct materials cost per set 35 $60 $85 $120 19 24 $ U 7 $ 13 Budgeted Cost Cost Driver Materials handling $ 350,200 Number of parts Product scheduling 162,000 Number of production orders Setup labour 215,000 Number of setups Automated machinery 1,785,000 Machine hours Finishing 620,250 Direct labour hours Pack and ship 292,325 Number of orders shipped $ 3,424,775 General, seling and administrative costs 4,950,000 9 o The budgeted production data for the three product lines follow: -1 2 Product Lines Value Quality Luxury Sets produced 15,100 4,900 600 Price $660 $900 $1,150 85 Direct materials cost per set $60 $85 $120 36 Number of parts per set 32 51 115 37 Direct labour hours per set 4 6 8 38 Machine hours per set 3 8 16 39 Production orders 52 73 195 Production setups 22 51 60 Orders shipped 1,100 2,000 350 42 Number of inspections 2 7 15 43 44 Required: 46 1) Determine the cost per set and the total production cost of each of the three customer groups 47 using activity based costing 2) Determine the production cost for each of the three customer groups using BF Al's current 50 volume-based approach. 52 3) Compare the two approaches and discuss the strategic and competitive issues of using each 53 of the two methods 40 55 56 57 58 59