(33} A CASE STUDY BETTER BACKPACKS Inc produces backpacks from vegan leather, cotton and waterproof synthetic materials in a single factory. The basic product is a standard backpack made from vegan leather lined with cotton. The standard backpack is a highquality item and has sold well for many years. Last year the company decided to expand its product line and produce deluxe backpacks for special orders. These backpacks differ from the standard in that they vary in size, contain the finest waterproof synthetic materials and have the buyer's name embossed on them. Bergman, the CEO was reviewing the cost reports. \"That's ridiculous!" said Bergman. Why do we go on producing those standard backpacks when we're able to make so much more on the deluxe backpacks!\" "I agree that the deluxe business is looking better and better,\" said the company's marketing manager. \"And there seems to be plenty of deluxe work out there particularly since the competition has not been able to match our prices. Did you know that Herscal, our biggest competitor, charges over $60 a unit for its deluxe items? Now, that what I call ripping off your customers!\" A breakdown of the manufacturing costs for each of BB'S product line is as follows. Standard Deluxe Backpacks Backpacks Monthly production 10,000 units 3,000 units Direct materials Vegan leather $140,000 $24,000 Cotton 49,000 16,500 Waterproof synthetics M 15,750 Total direct materials 189,000 56,250 Direct labor 8,000 24,000 MOH applied 100,000 30,000 Total manufacturing costs $297,000 $110,250 Manufacturing overhead is applied to products on the basis of machine hours. The estimated manufacturing overhead of $130,000 and each backpack requires 30 minutes of machine time. The following additional information is available: a. The selling prices for each type of product Standard Backpacks Deluxe Backpacks Selling price per unit $35.00 $50.00 b. Standard backpacks are produced in batches of 200 and deluxe backpacks are produced in batches of 20. Each time a batch is produced a setup is required. A setup for the standard items requires 1 hour and the set up for a deluxe item requires 3 hours. c. All backpacks are inspected to ensure quality. A total of 250 inspection hours is spent on the standard backpacks and a total of 750 inspection hours are spent on the deluxe backpacks each month. d. The company is considering using ABC as an alternative to the traditional costing method currently being used. After some analysis the following information about the MOH has been determined: Activity Cost Pool Activity Driver Estimated MOH cost Purchasing Number of purchase orders $10,500 Materials handling Number of receipts 22,500 Set ups Set-up hours 28,500 Inspections Inspection hours 16,500 Frame assembly Assembly hours 13,000 Machining Machine hours 39,000 TOTAL $130,000 Standard Deluxe Total Number of purchase orders Vegan leather 24 46 70 Cotton 51 79 130 Waterproof synthetics 0 100 100 Number of receipts (for materials handling) Vegan leather 46 14 60 Cotton 70 10 80 Waterproof synthetics 0 160 160 Set up hours ? ? ? Assembly hours 650 650 1,300 Machine hours