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CASE 7A-6 Contrasting Activity-Based Costing and Traditional Costing ILO2, LO3, LO4. LO6 Wow! Is that R-92 model ever a loser! It's time to cut back

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CASE 7A-6 Contrasting Activity-Based Costing and Traditional Costing ILO2, LO3, LO4. LO6 Wow! Is that R-92 model ever a loser! It's time to cut back its production and shi resources toward the new T 95 model. said Graham Thomas, executive vice-preside Thomas Products Inc. Tust look at this income statement Ive received from accountin of . The tn is generating over eight times as much profit as the R-92 on one-sixth of the unit sale convinced that our future depends on the T-95. The year-end statement to which Tho referring is shown below Model Total R-92 Sales Cost of goods sold Gross margin Less selling and administrative expenses Operating income Number of units produced and sold 1,125000 6900,000 225,000 3,675,000 550000 5,490000 3,510000 3,450,000 60,000 30,000 15,000 $490000 5000 manager The numbers sure look that way, replied Julie Williams, the company's sales ma now we've been producing the But why isn't the competition more excited about the T-95? I k what a cash cow it is." labou the T-95. That's considerably less than it used to take us." del for only three years, but I'm surprised that more of our competitors haven't reco I think it's our new automated plant." replied Thomas. "Now it takes only two dire ur-hours to produce a unit of the R-92 and three direct labour-h ours to produce a unit of I agree that automation is wonderful: replied Williams. I suppose that's how we're able to down the price of the T-95. Taylor Company in England tried to bring out a T-95 but discov ered they couldn't touch our price. But Tay lor is killing us on the R-92 by undercutting our p some of our best customers. I suppose they'll pick up all of our R-92 business if we m that market. But who cares? We don't even have to advertise the T-95: it just seems to sell it My only concern about automation is how our manufacturing overhead rate has shot up said Thomas. "Our total manufacturing overhead cost is $2.700,000. That comes out hefty amount per direct labour-hour, but Dianne down in acco labour-hours as the base for computing overhead rates for years and doesn't want to ch don't suppose it matters as long as costs get assigned to products to unting has been using direct I've never understood that debit and credit stuff replied Williams. "But I think you've a problem in production. I had lunch with Janet, our plant manager. yesterday and she com plained about how complex the T-95 is to produce. Apparently they have to do a lot of setups pecial soldering and other work on the T-95 just to keep production moving. And they to inspect every single unit out the R-92. We've got to increase our bottom line or we'll all be looking for jobs Required It'll have to wait," said Thomas. Tm writing a proposal to the board of directors to 1. Compute the predetermined overhead rate based on direct labour-hours that the compa 2. Direct materials and direct labour costs per unit for the two products are as follows used during the year. (There was no underapplied or overapplied ov erhead for the year.)

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