A dollar of gross margin per briefcase? Thats ridiculous! roared Art Dejans, president of CarryAll, Inc. Why do we go on producing those standard briefcases when were able to make over $15.50 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 he had just received from the companys accounting department:

	Standard Briefcases	Specialty Briefcases
Selling price per unit	$ 37.00	$ 51.80
Unit product cost	35.50	32.00
Gross margin per unit	1.50	19.80

CarryAll 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 $66.80 a unit for its specialty items? Now thats what I call gouging the customer!

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

		Standard Briefcases		Specialty Briefcases
Units produced each month			12,300	2,800
Direct materials:
Leather	1.0 m2		$ 15.50	0.5 m2 $ 7.75
Fabric	1.0 m2		7.10	1.0 m2 7.10
Synthetic				7.10
Total materials			22.60	21.95
Direct labour	0.5 h @	$10.00	5.00	0.5 h @ $10.00 5.00
Manufacturing overhead	0.5 h @	$20.00	10.00	0.5 h @ $20.00 10.00
Unit product cost			$ 37.60	$ 36.95

Manufacturing overhead is applied to products on the basis of direct labour-hours. The rate of $20 per direct labour-hour is determined by dividing the total manufacturing overhead cost for a month by the direct labour-hours:

Manufacturing overhead cost, $128,580/labour-hours, 6,429 = $20 per DLH Direct

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

1. Standard briefcases are produced in batches of 246 units, and specialty briefcases are produced in batches of 25 units. Thus, the company performs 170 setups each month (50 setups for the standard items and 100 setups for the specialty items). A setup for the standard items requires one hour, whereas a setup for the specialty items requires two hours.
2. All briefcases are inspected to ensure that quality standards are met. A total of 330 hours of inspection time is spent on the standard briefcases and 530 hours of inspection time is spent on the specialty briefcases each month.
3. A standard briefcase requires 0.5 hours of machine time, and a specialty briefcase requires 2.5 hours of machine time.
4. 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	$ 14,400
Materials handling	Number of receipts	17,000
Production orders and setup	Setup-hours	26,375
Inspection	Inspection-hours	21,930
Frame assembly	Assembly-hours	7,750
Machine related	Machine-hours	41,125
		$ 128,580

Required:

1. Using ABC, determine the amount of manufacturing overhead cost that would be applied to each standard briefcase and each specialty briefcase. (Do not round intermediate calculations. Round your answers to the nearest dollar amount.)

	Standard Briefcases		Specialty Briefcases
	Activity	Amount	Activity	Amount
Purchasing order:
Leather	29		51
Fabric	56		84
Synthetic			140
Material handling receipt:
Leather	51		19
Fabric	80		20
Synthetic			170
Production orders and equipment setup
Inspection
Frame assembly	500		500
Machine related
Total overhead cost

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. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Activities Base
	Standard	Specialty
Total unit product cost

3-a. Within the limitations of the data that have been provided, evaluate the presidents concern about the profitability of the two product

lines. (Negative amount should be indicated by minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Standard Briefcases	Specialty Briefcases
Gross margin (loss) per unit

3-b. Would you recommend that the company shift its resources entirely to production of specialty briefcases?

yes or No