Ajax Manufacturing Company case

Questions:

Calculate the product costs based on the activity data provided in the case. Compare the product cost numbers derived from the three systems (traditional, modem and ABC) and discuss the strengths and weaknesses of each of the three systems.

Discuss the strategic and competitive consequences of adopting each of the costing system. What is your diagnosis of the competitive problem faced by Ajax?

Ajax Manufacturing Company
Product profitability data can be summarized as follows:
	A	B	C
Standard Cost	$105.70	$87.16	$52.85
Target Selling Price	$162.61	$134.09	$81.31
Planned Gross Margin %	35%	35%	35%
Actual Selling Price	$162.61	$125.96	$105.70
Actual Gross Margin %	35%	31%	50%
EXHIBIT 1
BASIC PRODUCT INFORMATION	A	B	C
Production	10,000units	15,000units	5,000units
	in 1 run	in 3 run	in 10 run
Shipments	10,000units	15,000units	5,000units
	in 1 shipment	in 5 shipment	in 20 shipment
Selling Prices
Target	$162.61	$134.09	$81.31
Actual	$162.61	$125.96	$105.70
	Manufacturing Cost
Raw material	5 components	6 components	10 components
	@$4. ea.= $20	@$5. ea. = $30	@$I. ea.= $10
Labor Usage
(labor = $20. /hr. including fringe benefits)
Set-up labor	10 hrs. per	10 hrs. per	11 hrs. per	Total
	Production run	Production run	Production run	150 hours
Run Labor	12 hr. per	1/3 hr. per	1/4 hr. per
	part	part	part	11,250 hours
Machines Usage
(Machine cost = $70./hr.)
	1/4 hr. per	1/3 hr. per	12 hr. per
	part	part	part	10,000 hours
Other Overhead*
Receiving Department				$300,000
Engineering Department				500,000
Packing Department				200,000
Set-uo Labor	0.02	0.04	0.44
Direct Labor	10	6.67	5
Other Overhead
(Machine Hours Basis)	35	46.67	70
Machines	$700,000
Engineering	500,000
Packing	200,000
	$1,400,000
(Overhead rate =
($1,400,000/10,000 = $140./hr.
Total	73.62	96.28	$89.74

Product profitability data can be summarized as follows:
	A	B	C
Standard Cost	$105.70	$87.16	$52.85
Target Selling Price	$162.61	$134.09	$81.31
Planned Gross Margin %	35%	35%	35%
Actual Selling Price	$162.61	$125.96	$105.70
Actual Gross Margin %	35%	31%	50%
EXHIBIT 1
BASIC PRODUCT INFORMATION	A	B	C
Production	10,000units	15,000units	5,000units
	in 1 run	in 3 run	in 10 run
Shipments	10,000units	15,000units	5,000units
	in 1 shipment	in 5 shipment	in 20 shipment
Selling Prices
Target	$162.61	$134.09	$81.31
Actual	$162.61	$125.96	$105.70
	Manufacturing Cost
Raw material	5 components	6 components	10 components
	@$4. ea.= $20	@$5. ea. = $30	@$I. ea.= $10
Labor Usage
(labor = $20. /hr. including fringe benefits)
Set-up labor	10 hrs. per	10 hrs. per	11 hrs. per	Total
	Production run	Production run	Production run	150 hours
Run Labor	12 hr. per	1/3 hr. per	1/4 hr. per
	part	part	part	11,250 hours
Machines Usage
(Machine cost = $70./hr.)
	1/4 hr. per	1/3 hr. per	12 hr. per
	part	part	part	10,000 hours
Other Overhead*
Receiving Department				$300,000
Engineering Department				500,000
Packing Department				200,000