Question
Division A at Geunhye-Park Foods (GPF) operates at capacity and considers applying ABC analysis to three product lines within its division: tofu, milk, and ramen.
Division A at Geunhye-Park Foods (GPF) operates at capacity and considers applying ABC analysis to three product lines within its division: tofu, milk, and ramen. Mary Lamb, the manager of Division A, identifies four activities and their activity cost allocation rates as follows:
Ordering $102 per purchase order
Machine set up $78 per set up
Freezing $21 per hour
Packaging $0.22per item sold
The revenues, cost of goods sold, and activity usage of the three product lines (year 2019) are as follows:
Using a division wide allocation rate, Division A allocated manufacturing overhead to the three products at the rate of 30% of direct manufacturing cost. Profitability is measured by gross margin Revenues.
a) Using a division wide allocation rate, calculate the gross margin of Tofu.
b) Using ABC, determine the ranking of profitability among the three product lines for year 2019 for Division A. (i.e., specify the highest, the middle, and the lowest profitable product line.)
c) The COVID-19 pandemic has hit Division As business significantly. Specifically, Division A expects that, in year 2020, there will be no freezing activity because Division A wants to sell the products as fresh as possible. Division A wants to manufacture the products at a smaller batch each time so there is a 100% increase of set up activities for every product line as below.
If everything else is equal (activity cost allocation rate, direct manufacturing cost and sales revenue for all three products remain the same), provide the annual change of gross margin under ABC for each product and for Division A (i.e., total gross margin under ABC in 2020 minus total gross margin under ABC in 2019).
Tofu Milk Ramen $59,000 $36,000 ? $66,000 $48,000 ? $51,000 $34,000 ? Year 2019 for Division A Financial data Revenues Direct manufacturing cost Manufacturing overhead allocated Activity usage (cost-allocation base used) Ordering (purchase orders) Machine set up (set ups) Freezing (hours) Packaging (items sold) 25 90 190 13,500 20 35 180 17,500 15 30 40 8,000 Milk Pandemic effect on Division A's operation (Year 2020) Activity Tofu Ordering 25 Machine set up 180 Freezing 0 Packaging 13,500 20 70 0 17,500 Ramen 15 60 0 8,000Step by Step Solution
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