255 (e) Suppose overhead costs are categorized into plant and equipment, management, purchasing, and sales and shipping. Plant and equipment costs use square footage as a base, where floor space dedicated to specific products (e.g., product-specific inventory sites) is assigned to individual products, while shared space is allocated equally. Management costs use labor hours as the base (i.e., as used in part b for all overhead costs). Purchasing uses purchase orders, where parts ordered for a specific product are counted toward that product and common parts are divided equally. Sales and shipping costs are allocated according to customer orders, where, again, orders for unique products are counted by product and orders for multiple products are split equally. The breakdown of overhead costs and the allocation of base units by product are given as follows: Category Total cost Base Total units used Units X-100 Units X-200 Units X-300 Plant and Equipment Management $250,000 $100,000 Square feet Labor hours 120,000 49,625 40,000 18,125 50,000 16,500 30,000 15.000 Sales and Purchasing Shipping $60,000 $50,000 Purchase orders Customer orders 150 500 600 900 2,000 100 (i) Compute the unit profit for each product, using an ABC allocation of overhead cost based on the above breakdowns. Compare these with the estimates of unit profits obtained by using a labor-hours allocation scheme. (ii) Do the ABC unit profits suggest a different production plan? If not, suggest one and compute its monthly profit and compare to that of the current plan and that suggested by the labor-hours cost allocation. (iii) What is wrong with using the approach of computing unit profits for each product and then using them to produce as much as possible of the most profitable products? 255 (e) Suppose overhead costs are categorized into plant and equipment, management, purchasing, and sales and shipping. Plant and equipment costs use square footage as a base, where floor space dedicated to specific products (e.g., product-specific inventory sites) is assigned to individual products, while shared space is allocated equally. Management costs use labor hours as the base (i.e., as used in part b for all overhead costs). Purchasing uses purchase orders, where parts ordered for a specific product are counted toward that product and common parts are divided equally. Sales and shipping costs are allocated according to customer orders, where, again, orders for unique products are counted by product and orders for multiple products are split equally. The breakdown of overhead costs and the allocation of base units by product are given as follows: Category Total cost Base Total units used Units X-100 Units X-200 Units X-300 Plant and Equipment Management $250,000 $100,000 Square feet Labor hours 120,000 49,625 40,000 18,125 50,000 16,500 30,000 15.000 Sales and Purchasing Shipping $60,000 $50,000 Purchase orders Customer orders 150 500 600 900 2,000 100 (i) Compute the unit profit for each product, using an ABC allocation of overhead cost based on the above breakdowns. Compare these with the estimates of unit profits obtained by using a labor-hours allocation scheme. (ii) Do the ABC unit profits suggest a different production plan? If not, suggest one and compute its monthly profit and compare to that of the current plan and that suggested by the labor-hours cost allocation. (iii) What is wrong with using the approach of computing unit profits for each product and then using them to produce as much as possible of the most profitable products