- Determine the full product cost and selling prices for one Cortland 1000 and one Cortland 2000 under an activity-based costing system.
FINANCIAL INFORMATION CMI's budgeted direct-labor costs were $60 million. Based on expected sales, the company estimated that its raw material purchases and use would total $300 million. Manufacturing overhead was budgeted at $196 million, and currently was assigned to each computer on the basis of machine hours. As indicated above, computers were priced at full production cost plus a markup of 50 percent. Exhibit 1 shows the expected direct manufacturing cost for two of the company's computers. The Cortland 1000 was a very popular computer with a large production and sales volume. By contrast, the quantity of Cortland 2000s manufactured and sold was expected to be much lower than any of the company's other computers. Nevertheless, Mr. Works had thought that, when all manufacturing costs were considered, the Cortland 2000 would contribute a reasonable amount of money to CMI's selling, general, and administrative costs, and hence to the company's overall profits. Mr. Works' concern had arisen because CMI's accountant had told him that he thought the company's traditional product-costing system was providing misleading cost information. He had developed an analysis of the budgeted manufacturing overhead costs, shown in Exhibit 2. Data for the annual production of Cortland 1000 and Cortland 2000 computers are shown in Exhibit 3. Mr. Works commented: I don't know quite what to make of all of these data. Clearly some analysis is called for. I guess what I really need is a sense of the true manufacturing cost of each of these computers. Even though we can't change the prices this year, we at least need to know if we're covering our full production cost on the Cortland 2000 and have something left to contribute to the company's selling, general, and administrative costs. I had thought this was the case, but now I'm not so sure. CORTLAND MANUFACTURING COMPANY Exhibit 1. Direct Manufacturing Costs for One Computer Cortland 1000 Cortland 2000 Raw (direct) material $1,000 $2,500 Direct labor $200 $400 Exhibit 2. Analysis of Annual Budgeted Manufacturing Overhead Costs Activity Cost Driver Budgeted Activity Budgeted Cost Raw material handling Received orders 200 $90,000,000 Machine adjusting Setups 2,000 12,000,000 Packing Batches 500 60,000,000 Raw material inspecting Inspecting hours 200,000 10,000,000 Soldering Soldering hours 200,000 12,000,000 Assembly Assembly hours 100,000 12.000.000 Total $196,000,000 Exhibit 3. Annual Production Data for Cortland 1000 and Cortland 2000 Computers Cortland 2000 Item Budgeted production Received order size* Batch size Machine setups Inspecting time Soldering time Assembly time Measure Cortland 1000 no. of computers 20.000 5,000 size of order 10,000 500 computers 5,000 100 per batch 5 hours per computer 1 hours per computer 3 hours per computer 1 * The company received 2 orders of raw materials each year for the Cortland 1000 (i.e., 20,000 computers = 10,000 order size)
