3.

Fifer Company produces two types of entry doors: the Hollow Core and the Solid Door models. The Company has used direct labor dollars to allocate the overhead cost $47,450,000.

The companys CFO, Brian Smythe , has offered the following information regarding the two products:

Hollow Core Solid Door

Sales in units 400,000 50,000

Sales price per unit $475.00 $650.00

Direct materials per unit 55.00 130.00

Direct labor cost per unit 75.00 50.00

The company has hired you as an outside consultant to review the cost system and make recommendations. You decide that an Activity Based Cost system should be considered and compile the following information based on conversations with the production manager:

Activity Cost Driver Cost

Order Taking Number of orders $ 500,000

Setups Number of setups 5,000,000

Machine cost Number of machine hours 41,950,000

The number of transactions for each cost driver is as follows:

Cost Driver Total Hollow Solid

Number of orders 500 100 400

Number of setups 2,500 2,000 500

Number of machine hours 600,000 300,000 300,000

Compute the product cost per door (per unit) using activity based costing for each product. Hollow Core Solid Door Product Cost per door ________________ ___________________ 4. How should Mr. Smythe explain the reasons for any differences observed in your analysis above?