Activity Based Costing Case "I say it's time we cut back on the X-20 model and shift our resources toward the new Z-50 model," said Bailey Demirka, executive vice president of Abdex Products, Inc. "Just look at this statement I've received from accounting. The Z-50 is generating more than sixteen times the profits of the X-20, and it has only about one fifth as much in sales. I've become convinced that our future depends on the Z-50." The statement to which Tanika was referring follows: ABDEX PRODUCTS, INC. Income Statement For the Year Ended June 30, 2023 Total Z-50 X-20 Sales $ 2,330,000 $ 430,000 $1,900,000 Cost of goods sold 1,920,000 220,000 1,700,000 Gross margin 410,000 210,000 200,000 Less selling and administrative expenses 233,000 43,000 190,000 Net Income $177,000 $ 167,000 $ 10,000 Number of units produced and sold - 1,000 5,000 Net income per unit sold - $167 $2 "The numbers sure look that way," replied Jahi Zayas, the company's sales vice president. "But why aren't our competitors more excited about the Z-50? I know we've only been producing the product for three years, but it seems like more of them would recognize what a money maker it is." "I think its our new automated plant," said Bailey. "Now it takes only two direct labor- hours to produce a unit of the Z-50 and three hours to produce a unit of the X-20. That's half of what it used to take us." "Automation is marvelous," replied Jahi. "I suppose that's how we're able to hold down the price on the Z-50. Why, Ajama Company in Japan started to bring out a Z-50 but discovered they couldn't touch our price. But Ajama is killing us on the X-20; I suppose they'll pick up our X-20 customers as we move out of that market. But who cares? We don't even have to advertise the Z-50; it just seems to sell itself." "My only concern about automation is how our overhead rate has shot up," said Bailey. "Our total overhead cost was $816,000 for the fiscal year that just ended. That comes out to a hefty amount per direct labor-hour, but old Jean down in accounting has been using labor-hours as a base for computing overhead rates for years and doesn't want to change. I don't suppose it matters so long as costs get assigned to products." "That bookkeeping bores me," replied Jahi. "But I think you've got a problem in production. I had lunch with Hanna yesterday, and she was complaining about how complex the Z-50 is to produce. Apparently, they have to do a lot of machine setups and other engineering work just to keep production moving on the Z-50. "

"It'll have to wait," said Bailey. "I'm writing a proposal to the board to phase out the X-20 as rapidly as possible. We've got to bring those profits up or we'll all be looking for jobs." *************************************************************************************** Assume that there was no under or overallocated overhead for the year and that direct materials and direct labor (per unit of output) for the products were as follows: Z-50 X-20 Direct Materials $100 $160 Direct Labor $ 24 $ 36 Assume also that the company's $816,000 in overhead cost is related to four activities as follows: Number of Events or Transactions Activity Cost Total Z-50 X-20 Machine Related Costs $450,000 9,000 machine-hrs 4,000 machine-hrs 5,000 machine-hrs Setup and Inspections 180,000 40 production runs 20 production runs 20 production runs Engineering Change 90,000 100 change orders 75 change orders 25 change orders Plant Related Costs 96,000 1,920 sq. ft. 1,536 sq. ft. 384 sq. ft. $816,000