"A dollar of gross margin per briefcase? That's ridiculous!" roared Art Dejans, president of CarryAll, Inc. "Why do we go on producing those standard briefcases when we're able to make over $18.50 per unit on our specialty items? Maybe it's 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 company's accounting department: Selling price per unit Unit product cost Gross margin per unit Standard Briefcases $ 43.00 38.50 4.50 Specialty Briefcases $ 60.20 35.00 25.20 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 buyer's 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 company's marketing manager. "And there seems to be plenty of specialty work out there, particularly since the competition hasn't been able to touch our price. Did you know that Armour Company, our biggest competitor, charges over $75.20 a unit for its specialty items? Now that's what I call gouging the customer!" A breakdown of the manufacturing cost for each of CarryAll's product lines follows: Standard Briefcases Specialty Briefcases 11,100 2,600 1.0 m2 $ 18.50 6.30 0.5 m2 1.0 m2 1.0 m2 Units produced each month Direct materials: Leather Fabric Synthetic Total materials Direct labour Manufacturing overhead Unit product cost : : : : $ 9.25 6.30 6.30 21.85 4.00 10.00 $ 35.85 24.80 4.00 10.00 $ 38.80 0.5 h @ $ 8.00 0.5 h @ $20.00 0.5 h @ $ 8.00 0.5 h @ $20.00 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, $142,544 Direct labour-hours, 7,127 = $20 per DLH The following additional information is available about the company and its products. a. Standard briefcases are produced in batches of 222 units, and specialty briefcases are produced in batches of 25 units. Thus, the company performs 170 setups each month (80 setups for the standard items and 160 setups for the specialty items). A setup for the standard items requires one hour, whereas a setup for the specialty items requires two hours. b. All briefcases are inspected to ensure that quality standards are met. A total of 510 hours of inspection time is spent on the standard briefcases and 710 hours of inspection time is spent on the specialty briefcases each month. c. A standard briefcase requires 0.5 hours of machine time, and a specialty briefcase requires 2.5 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 Purchasing Materials handling Production orders and setup Inspection Frame assembly Activity Measure Number of orders Number of receipts Setup-hours Inspection-hours Assembly-hours Estimated Overhead Cost $ 13,224 16,200 41,400 28,670 10,800 Machine related Machine-hours 32,250 142,544 $ 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 Activity Amount Specialty Briefcases Activity Amount Purchasing order: Leather 27 49 Fabric 54 82 136 Synthetic Material handling receipt: Leather 49 17 Fabric 76 16 166 Synthetic Production orders and equipment setup Inspection Frame assembly Machine related 800 800 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 president's 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