CASE FACTS:

Omega Optical is a specialist manufacturer of optical instruments. Omega has recently expanded its core product market of binoculars into making eyepieces for microscopes / telescopes, and screw-on lenses for digital SLR cameras. The firm believes that it makes little money selling binoculars and that these new markets have great profit potential.

Somewhat to Omegas surprise, it finds it tough to make money with eyepieces. As of now, the firm appears to be selling the product at a low profit margin. Yet, Omega faces intense price pressure in this segment, and thinks that it might have to lower prices by 10% or more to stay competitive. The market for binoculars has been stable recently and Omega expects the trends to continue for the near future. Omega is most excited about entering the market for screw-on lenses for digital cameras. Although current volumes are small (relatively), Omega believes that there is substantial market potential for this product. Leveraging its excellent reputation for optics and lenses, Omega believes that it could reach and sustain two times the current volume of this product. This strategy also seems to make sense financially as this product looks like the most profitable of the three lines, per the firms accounting records.

The following table provides key information about the product lines. (Note: All data have been disguised for confidentiality. However, relations among data items have been preserved.)

OMEGA OPTICAL INDIVIDUAL PROJECT FALL 2016

Eyepieces Binoculars

Camera Lens

Sales volume (units) 100,000 40,000 28,000

Selling Price $80.00 $160.00 $196.00 TRACEABLE COSTS

Per Unit Direct Costs of Labor & Materials 39.60 55.00 63.50

Per Unit Variable Costs of Licensing & Patent fees 20.40 40.40 48.50

OVERHEAD	?	?	?
Unit Profit Margin After Deducting Traceable Costs and Overhead	?	?	?

Labor hours / unit 2 4 5

Currently, the firm incurs a total of $3,100,000 in overhead costs per period. Currently Omega allocates this overhead among product lines using the number of labor hours used by each product line. Omega produces on a just in time basis so there are no significant work in process or finished goods inventories at the end of the accounting period.

Required for part A

A. Determine the overhead allocation rate that Omega is currently using to assign overhead costs, and then calculate the profit per unit using that rate. Use the template on the next page to present your answers

OMEGA OPTICAL INDIVIDUAL PROJECT FALL 2016

Step 1. Total direct labor hours producing eyepieces? X =
Step 2. Total direct labor hours producing binoculars? X =
Step 3. Total direct labor hours producing camera lens? X =
Step 4: Total direct labor hours producing all 3 products + + =
Step 5: Overhead rate per direct labor hour: divided by =
Step 6: Overhead per unit for eyepieces X =
Step 7: Overhead per unit for binoculars X =
Step 8: Overhead per unit for camera lens X =
Step 9: Profit per unit for eyepieces minus minus minus =
Step 10: Profit per unit for binoculars minus minus minus =
Step 11: Profit per unit for camera lens minus minus minus =

Omega management realizes that moving to camera lenses is a major shift in their product and market focus. Plus, they know that factory personnel have complained about the increased coordination required for producing camera lenses. Thus, management wants us to conduct a more detailed study of product costs. We collect the following data.

Eyepieces Binoculars Camera Lens

Sales volume (units)	100,000	40,000	28,000
Machine hours	5,000	19,000	28,000
# of batches	20	70	112
# of Components in each unit of product	8	20	40
# of receiving transactions	1,000	1,250	3,500
# of inspections	160	400	2,240

Analyzing the overhead, you discover the following:

Item	Amount
Labor related	$849,720
Machine related	581,316
Production order costs	411,248
Other Set Up Costs	551,252
Parts administration	286,280
Inventory management	232,950
Inspection and Quality Control Costs	187,234
Total	$3,100,000

You wonder how best to allocate these costs into cost pools. You settle on forming a total of 6 pools.

Pool 1: Labor related costs. Experience shows that for Omega Optical direct labor hours are what drives these costs and causes them to vary.

Pool 2: Machine related costs. These are driven by machine hours

Pool 3: Cost related to executing a production order (this would include production order costs and other set up costs), allocated using the number of batches.

Pool 4: Related to parts administration, which will be allocated based on the number of components in each product multiplied times the number of units

Pool 5: Costs related to inventory management. These costs are allocated based on the number of receiving transactions.

Pool 6: Costs related to inspections and quality control. These costs would be allocated based on the number of inspections.

Requirements of parts B to G: Now using activity base costing:

B. Summarize the total amounts in each of the six cost pools and then divide by the cost driver activity (from the data we collected) to determine the cost per driver unit for each cost pool.

Step 1: Total amounts in the 6 cost pools. In some cases you need to add several numbers. In other cases it is just the given number.

Labor related costs =

Machine related costs =

Production order related costs =

Parts administration = Total inventory, receiving and shipping = Inspection & Quality Control =

Step 2: Total use of the cost driver. You need to combine several numbers in most cases.

Labor hours =

Machine hours =

Number of batches =

Parts x Units =

Receiving Transactions =

Number of inspections =

Step 3. Rate per driver unit for Labor related costs (pool 1)

divided by =

Step 3. Rate per driver unit for Machine related costs (pool 2)

divided by =

Step 3: Rate per driver unit for Production order related costs (pool 3)

divided by =

Step 3: Rate per product line for parts administration (pool 4)

divided by =

Step 3: Rate per driver unit for Inventory, receiving, shipping costs (pool 5)

divided by =

Step 3: Rate per product line for inspections (pool 6) : =

divided by =

C. Next determine the total amount of overhead allocated to each of the 3 product lines. (Step 4)

Total overhead for eyepieces:

Pool 1 X = Pool 2 X = Pool 3 X = Pool 4 X =

Pool 5 X =

Pool 6 X =

TOTAL OVERHEAD ALLOCATED TO EYEPIECES =

Total overhead for binoculars:

Pool 1 X = Pool 2 X =

Pool 3 X =

Pool 4 X =

Pool 5 X =

Pool 6 X =

TOTAL OVERHEAD ALLOCATED TO BINOCULARS =

Total overhead for camera lens:

Pool 1 X = Pool 2 X = Pool 3 X = Pool 4 X = Pool 5 X =

Pool 6 X =

TOTAL OVERHEAD ALLOCATED TO CAMERA LENS

D. Now compute the cost per unit of overhead using activity based costing

Product	Total Overhead Allocated	Production in Units	Overhead Cost per Unit
EYEPIECES:
BINOCULARS:
CAMERA LENS:

E. Now compute the total unit cost and the profit margin per unit using activity based costing.

Product	Direct materials and labor per unit	Licensing, Patent fee per unit	Overhead Cost per unit	Total Unit Cost
EYEPIECES:
BINOCULARS:
CAMERA LENS:

Product	Selling Price	Total Unit Cost	Profit Margin Per Unit
EYEPIECES:
BINOCULARS:
CAMERA LENS:

NOTE: ANSWERING PARTS F AND G OF OMEGA OPTICALS BELOW

There is no "single" correct answer. Your answers should show some thought and professional presentation. If you are unwilling to be professional in your answer, then we are unwilling to give you full credit. Short phrase, single word scrawled answers will not receive full credit.

F. Based on the ABC profit margins, what actions would you recommend for Omega management?

G. Suppose Omega was to achieve a level of sales for camera lenses equal to 56,000 units (2 times the current level). How would this affect profitability if it could produce this many by doubling the size of each batch without increasing the number of batches?

NOTE: In your answer to this part you should use the numerical results you calculated in previous parts of this project, and show thought and analysis.

However, it may be that there is not enough information for you to give a decisive precise answer, and so do your best to give an intelligent answer.