4. (20 Points) Can you help Mr. Smith explain to his colleagues why the unit cost for Artisan differs so much under traditional costing system versus under activity-based costing system? Your explanation should not be more than 1/2 page double spaced with a 12 font size.

5. (10 Points) Assume next year that the activity rates remain the same as you calculated in question (2). Assume that the demand for Artisan is expected to increase significantly. Consequently, the firm expects to produce more batches of Artisan next year than this year and the firm plans to produce in batch sizes of 100 rather than 50. Calculate what the equipment setup cost per unit of Artisan will be next year if it can be calculated. If it cannot be calculated, then explain in words why the equipment setup cost per unit of Artisan cannot be determined in the absence of more information. Excluding your quantitative analysis if any, your explanation should not be more than 1/3 page double spaced with a 12 font size.

6. (10 Points) Question 6 is independent of question 5. Next year, because of an expected increase in product demand, machine hours are expected to increase from 80,000 to 200,000. The company will not need any new machinery since the current machinery is highly underutilized. Also, the number of testing hours will increase from 250,000 to 400,000. Assume that these new levels of operations are within the firms relevant range. Calculate what the activity rate for the cost pool of machining would be next year if it can be calculated. Also, calculate what the activity rate for the cost pool of testing would be next year if it can be calculated. If one or both rates cannot be calculated, then explain in words why the calculations cannot be determined in the absence of more information. Excluding any quantitative analysis, your explanation should not be more than 1/3 page double spaced with 12 font.

My staff has identified for Deloitte five activity cost pools. Information on those cost pools and the related activity measures are provided in Exhibit 2. Exhibit 2 Total Costs Allocation Base Equipment setups $4,000,000 number of setups Purchase orders $2,000,000 number of purchase orders Machining $5,000,000 number of machine hours Testing $7,000,000 number of testing hours Packaging and shipping $6,000,000 number of containers Level of Allocation Base 50,000 20,000 80,000 250,000 300,000 Although fixed costs are lumped in with variable costs across the five different cost pools, I am aware that machining related costs consists almost exclusively of depreciation costs. Hence, with respect to all questions asked in this case, machining costs will be treated as entirely fixed with respect to machine hours. Each machine is used in the production of multiple product lines. The resale value of machines is only affected by the passage of time and not by how much they are used in a given year. in this case, the firm will assume that costs associated with equipment setups, purchase orders, testing, and packaging & shipping are variable with respect to their respective activity measures. Currently, we believe our assumptions on cost behavior patterns are quite reasonable. All products are produced in batches, where the size of a batch differs across products. For example, if we produce 80 units of a product in batch sizes of 40, then the product will be produced in two batches. An equipment setup must be performed before producing each batch of a product. Hence, in the example above, two equipment setups would be performed. Units of product are packaged in containers and sent to distributors. Production volumes are set equal to sales volumes since the company only produces products that they have orders for. Consequently, the firm never has a beginning or ending work in process inventory, and it does not have a beginning or ending finished goods inventory. Further information on our two products is provided in Exhibit 3 Exhibit 3 Artisan 80,000 Classic 500,000 400 500 0.6 30,000 1,200 annual sales and production in units number of units per batch number of purchase orders number of machine hours per unit total number of testing hours total number of containers 320 50,000 4,000 My staff has identified for Deloitte five activity cost pools. Information on those cost pools and the related activity measures are provided in Exhibit 2. Exhibit 2 Total Costs Allocation Base Equipment setups $4,000,000 number of setups Purchase orders $2,000,000 number of purchase orders Machining $5,000,000 number of machine hours Testing $7,000,000 number of testing hours Packaging and shipping $6,000,000 number of containers Level of Allocation Base 50,000 20,000 80,000 250,000 300,000 Although fixed costs are lumped in with variable costs across the five different cost pools, I am aware that machining related costs consists almost exclusively of depreciation costs. Hence, with respect to all questions asked in this case, machining costs will be treated as entirely fixed with respect to machine hours. Each machine is used in the production of multiple product lines. The resale value of machines is only affected by the passage of time and not by how much they are used in a given year. in this case, the firm will assume that costs associated with equipment setups, purchase orders, testing, and packaging & shipping are variable with respect to their respective activity measures. Currently, we believe our assumptions on cost behavior patterns are quite reasonable. All products are produced in batches, where the size of a batch differs across products. For example, if we produce 80 units of a product in batch sizes of 40, then the product will be produced in two batches. An equipment setup must be performed before producing each batch of a product. Hence, in the example above, two equipment setups would be performed. Units of product are packaged in containers and sent to distributors. Production volumes are set equal to sales volumes since the company only produces products that they have orders for. Consequently, the firm never has a beginning or ending work in process inventory, and it does not have a beginning or ending finished goods inventory. Further information on our two products is provided in Exhibit 3 Exhibit 3 Artisan 80,000 Classic 500,000 400 500 0.6 30,000 1,200 annual sales and production in units number of units per batch number of purchase orders number of machine hours per unit total number of testing hours total number of containers 320 50,000 4,000