7 Activity-Based Costing C7-50 OAK LEAF EMBROIDERY Dale Gauthier and Randy "Chip" Charters were sitting at lunch at the beginning of April looking at the financial statements for January, February, and March and wondering why their profit was decreasing even though their sales were increasing. Their costs had remained stable, so an increase in costs was eliminated as a cause. The only difference they noticed was that customers seemed to be redesigning what they wanted embroidered to encompass more colours, and most of the increase in revenues came from new customers. For quoting orders. Dale and Chip have determined their costs for embroidering a logo on a T-shirt as follows: $4.00 Direct Materials 2.00 Direct labour 3.50 MOH 9.50 Total The manufacturing overhead was estimated using last year's financial statements. The VE MB 7 Activity-Based Costing The manufacturing overhead was estimated using last year's financial statements. The selling price was then determined by taking the total cost and adding a 30% markup. Dale and Chip are the owners and the only employees of the company. They pay themselves $20 per hour. They each share in the administrative work and the embroidery work for the production of the finished product. They can embroider 10 shirts per hour, but this is complicated when there are additional colours. Each job needs 6 minutes of set-up time and each colour change requires 12 minutes of labour to reconfigure the embroidery machine. The largest amount of time is taken up by the design work, though. Each new design or redesign of a logo requires 4 hours of Chip or Dale's day in order to produce the electronic code required for the embroidery machine. Dale and Chip incur administrative costs of $0.70 per order, as well. While at the sales counter this morning, Dale spoke with four customers, and he needs to produce a quote for each of them. Two of the jobs are for repeat customers who do not need any design work, and of the other two, one is for a repeat customer who wants to redesign the logo and the other is for a brand-new customer who will need the logo designed before any work can be done. The jobs also have different colour requirements and volumes as follows: Job 1: repeat customer (2 colours, 25 shirts) Job 2: repeat customer (5 colours, 200 shirts) Job 3: repeat customer with a redesign (2 colours, 200 shirts) Job 4: new customer (5 colours, 25 shirts) 7 Activity-Based Costing Job 3: repeat customer with a redesign (2 colours, 200 shirts) Job 4: new customer (5 colours, 25 shirts) Before lunch, Dale would simply have quoted $9.50 per shirt, but now she is second- guessing the amount, based on the trends of decreasing profits. She and Chip head back to work without a clear idea of how to write up the new quotes. REQUIRED: Provide a summary of why Oak Leaf's profits are decreasing even though sales are increasing, and compute the amount that should be quoted for each of the four customers based on an ABC system Assignment 2: Case (Activity-Based Costing) Prior to this discussion, it is mandatory that you review the material in Chapter 7 of your Management Accounting textbook. Read case assignment C7-50, Oak Leaf Embroidery, found on pages 452 and 453 of your textbook. The case requires that you: 1. Provide a summary of why Oak Leaf's profits are decreasing, even though sales are increasing. 2. Compute the amount that should be quoted for each of the four customers based on an activity-based cost (ABC) system. Under the "Discussions area, find your group and go to the discussion area for "Module 2, Part 2" Post your initial response to the case, Read the responses of your group members, and post your comments and reactions indicating why you agree or disagree. At the conclusion of the discussion, one group member will prepare a maximum 250-500-word response and post it in the "Group summaries" area (Module 2. Part 2) by the deadline indicated in your course schedule. The subject line of your posting should be: "Group letter, Case