A dollar of gross margin per briefcase? Thats ridiculous! roared Janet Dejans, president of Cases Inc. Why do we go on producing those standard briefcases when were able to make over $15 per unit on our specialty items? Maybe its time to get out of the standard line and focus the whole plant on specialty work.

Dejans is referring to a summary of average unit costs and revenues that she had just received from the companys accounting department:

	Standard Briefcases	Specialty Briefcases
Selling Price per unit	$36.00	$50.00
Unit product cost	35.00	32.50
Gross margin per unit	1.00	17.50

Cases Inc. produces briefcases from leather, fabric, and synthetic materials in a single plant. The basic product is a standard briefcase made from leather lined with fabric. The standard briefcase is a high-quality item and has sold well for many years.

Last year, the company decided to expand its product line and produce specialty briefcases for special orders. These briefcases differ from the standard in that they vary in size, contain the finest synthetic materials, and have the buyers name embossed on them. To reduce labour costs on the specialty briefcases, most of the cutting and stitching is done by automated machines. These machines are used to a much lesser degree in the production of standard briefcases.

I agree that the specialty business is looking better and better, replied Sally Henrie, the companys marketing manager. And there seems to be plenty of specialty work out there, particularly since the competition hasnt been able to touch our price. Did you know that Armour Company, our biggest competitor, charges over $65 a unit for its specialty items? Now thats what I call gouging the customer!

A breakdown of the manufacturing cost for each of Cases Incs product lines follows:

	Standard Briefcases		Specialty Briefcases
Units produced each month		9,000		2,250
Direct Materials:
Leather..	1.0 m2	$15.00	0.5 m2	$7.50
Fabric	1.0m2	5.00	1.0 m2	5.00
Synthetic		-----------		5.00
Total Materials..		20.00		17.50
Direct Labour	0.5 h @ $12.00	6.00		6.00
Manufacturing Overhead	0.5 h @ $18.00	9.00		9.00
Unit Product Cost.		$35.00		$32.50

Manuafacturing overhead is applied to products on the basis of direct labour-hours. The rate of $18 per direct labour-hour is determined by dividing the total manufacturing overhead cost for a month by the direct labour-hours:

Manufacturing overhead cost, $101,250 = $18 per DLH

Direct Labour Hours, 5,625

The following additional information is available about the company and its products.

a.Standard briefcases are produced in batches of 200 units, and specialty briefcases are produced in batches of 25 units. Thus, the company does 45 setups for the standard items each month and 90 setups for the specialty items. A setup for the standard items requires 1 hour, whereas a setup for the specialty items requires 2 hours.

b.All briefcases are inspected to ensure that quality standards are met. A total of 300 hours of inspection time is spent on the standard briefcases and 500 hours of inspection time is spent on the specialty briefcases each month.

c.A standard briefcases requires 0.5 hours of machine time, and a specialty briefcase requires 2 hours of machine time.

d.The company is considering using ABC as an alternative to its traditional costing system for computing unit product costs. Since these unit product costs will be used for external financial reporting, all manufacturing overhead costs are to be allocated to products, and nonmanufacturing costs are to be excluded from product costs. The ABC system has already been designed and costs allocated to the activity cost pools. The activity cost pools and activity measures follow:

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Purchasing	Number of orders	$12,750
Materials Handling	Number of receipts	$15,000
Production orders and setup	Set-up Hours	$22,500
Inspection	Inspection Hours	$16,000
Frame Assembly	Assembly Hours	$8,000
Machine related	Machine Hours	$27,000
		$101,250

	_________________Expected Activity_______________
Activity Measure	Standard Briefcase	Specialty Briefcase	Total
Number of Orders
Leather.	24	46	70
Fabric..	51	79	130
Synthetic Material	____	100	100
Number of Receipts
Leather.	46	14	60
Fabric..	70	10	80
Synthetic Material	-----	160	160
Setup Hours	?	?	?
Inspection Hours	?	?	?
Assembly Hours	800	800	1,600
Machine Hours	?	?	?

Required:

1.Using ABC, determine the amount of manufacturing overhead cost that would be applied to each standard briefcase and each specialty briefcase.

2.Using the data computed in part (1) and other data from the case as needed, determine the unit product cost of each product line from the perspective of the ABC system.

3.Within the limitations of the data that have been provided, evaluate the presidents concern about the profitability of the two product lines. Would you recommend that the company shift its resources entirely to the production of specialty briefcases? EXPLAIN.

4.Henrie stated that the competition hasnt been able to touch our price on specialty business. What do you think is the reason?