Case #1

Kumar Boats Limited manufactures and sells fishing boats. All of the companys sales come from two products: the Hauler and the Deluxe. The Hauler is a basic boat built with the minimum required components necessary for a successful outing and sells for $24,000. The Deluxe includes additional features unavailable on the Hauler, such as adjustable padded seats, moveable storage boxes, and rod holders, and sells for $29,000. The boats are sold to retailers who then usually add an outboard motor and a trailer before selling to the consumer.

Kumar Boats Limited management is meeting to discuss recent financial results and to plan for the future. Richard Rajan, the sales manager, advocates for keeping the prices of the two boats close in price since they share many similar features (e.g., size and weight, seating capacity, etc.). Mary Borkowski, the CEO of Kumar Boats, is concerned and has reviewed the financial information for both product lines. She has noticed that sales volume has been increasing while profits (as a percentage of sales) are decreasing. Mary consulted with her production manager, Craig Steele, who informed her that he is doing his best to control costs but it is difficult since the proportion of the Deluxe boats being manufactured and sold is growing at a much faster rate than sales of the Hauler.

Mary has asked the CFO for more detailed financial information regarding the sales and manufacturing costs of each product line for the past year. The following information was provided to Mary.

	Hauler	Deluxe
Direct materials cost per unit	$12,300	$16,400
Direct labour hours per unit	89	116
Units sold	245	134

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• Manufacturing overhead in the past year was $887,200.

• In the existing system, manufacturing overhead is applied on the basis of direct labour hours.

• The total direct labour hours for the past year were 22,180.

• The hourly rate for direct labour hours is $33.

• Selling and administrative costs for the past year was $1,468,000.

  To help Mary gain a better understanding of the costs of operations, she asked the CFO to provide her with information regarding the companys activities for the past year. Using an activity-based costing (ABC) approach, the CFO gathered the following information:

  Financial data for the two products, based on ABC analysis, is as follows:

Activity Centre	Cost Driver	Activity Cost	Activity Volume
Materials handling	Number of material moves	$210,800	5,270 moves
Equipment setup	Number of setups	$258,800	1,294 setups
Testing	Number of testing hours	$168,000	1,500 testing hours
Purchasing raw materials	Number of purchase orders	$249,600	2,600 purchase orders

	Hauler	Deluxe
Direct materials cost per unit	$12,300	$16,400
Direct labour hours per unit	89	116
Materials handling movements	4	32
Number of setups	2	12
Testing hours	2	14
Purchase orders required	3	15
Units sold	245	134

Required:

1. (A) Calculate unit cost using the existing costing system (i.e., using a single, plantwide rate to apply overhead costs). Calculate gross and net operating income generated for the company by the two products.

2. (B) Calculate activity rates, rounding to the nearest dollar.

3. (C) Calculate unit cost using activity-based costing, and recalculate gross and net operating

   income generated by the two products.

4. (D) Based on the results above, what advice would you give to Mary regarding her observation of increasing sales volume but decreasing profit?

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Case #2

Hoyoh Skateboards Company (HSC) is looking to acquire another skateboard manufacturer, FreeLife Limited. Freelife Ltd. recently filed for bankruptcy and management at HSC believes that they can generate a profit from this bankrupt company. FreeLife Ltd. has accounts with all of the major sporting goods chains in Canada, a segment of the market where HSC not present.

FreeLife Ltd. manufactures two product lines: traditional boards and long boards. Traditional boards for $159 each and the long boards for $315 each. In the past year, FreeLife Ltd. produced and sold 245,000 traditional boards and 36,000 long boards.

FreeLife Ltd. uses the absorption method of costing and provided the information below to HSC. The controller of FreeLife Ltd., when presenting this financial information, suggested that Hoyoh discontinue the traditional board product line after the acquisition. The company uses just-in-time (JIT) to manage inventories and, as a result, beginning and ending inventories are kept near zero (note: at the beginning and end of the prior year, inventories had zero values).

Total production costs for the past year for each product line are as follows:

	Traditional Boards	Long Boards
Direct materials	$20,335,000	$6,904,800
Direct labour	$2,940,000	$360,000
Variable manufacturing overhead	$1,960,000	$115,200
Variable selling and administrative costs	$490,000	$28,800
Fixed manufacturing overhead	$14,700,000	$1,800,000
Fixed selling and administrative costs	$2,970,000	$330,000

After reviewing the FreeLife Ltd.s operational and financial information, HSCs management is certain they can eliminate 40% of FreeLifes fixed manufacturing overhead and 80% of the fixed selling and administrative costs.

Required: (A) Using the absorption costing approach, calculate the total manufacturing cost per unit for

each product line without the cost savings projected by HSC. What is a likely reason for FreeLife Ltd. controllers suggestion to eliminate the traditional boards?

2. (B) Prepare a segmented income statement using variable costing (i.e., contribution margin income statement). Your income statement should reveal the overall impact of Hoyoh managements expected savings resulting from the merger. Would you suggest that the traditional boards be discontinued under Hoyohs control?

3. (C) What is a significant disadvantage of JIT with regard to inventory management? If FreeLife Ltd. did have large beginning and ending inventories, what might management have done during the prior year to improve the appearance of the companys income statement while looking for a buyer of the company?

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