Franklin Furniture, Inc. (FFI) manufactures bedroom furniture in sets (a set includes a dresser, two queen-size beds, and one bedside table) for use in motels and hotels. FFI has three customer groups, which it calls the value, quality, and luxury groups. The value products are targeted to low-price motels that are looking for simple furniture, while the luxury furniture is targeted to the very best hotels. The value line is attractive to a variety of hotels and motels that appreciate the combination of quality and value. Currently there has been a small increase in the low-cost and value lines, and an appreciable increase in demand in the luxury line, reflecting cyclical changes in the marketplace. Luxury hotels are now in more demand for business travel, while a few years ago, the value segment was the most popular for business travelers. FFI wants to be able to respond to the increased demand with increased production but worries about the increased production cost and about price setting as its mix of customers and production change. FFI has used a volume-based rate based on direct labor hours for some time. Direct labor cost is $15 per hour.

	Budgeted Cost	Cost Driver
Materials Handling	$349,600	# of Parts
Product Scheduling	160,000	# of Production Orders
Setup Labor	216,000	# of Setups
Automated Machinery	1,750,000	Machine Hours
Finishing	619,500	Direct Labor Hours
Pack and Ship	290,400	# of Orders Shipped
	$3,385,500
General, Selling, & Admin Costs	$5,000,000

The budgeted production data for the three product lines follow.

Product Lines	Value	Quality	Luxury
Units Produced	15000	5000	600
Price	$650	$900	$1,200
Direct Materials cost per unit	$80	$50	$110
# of Parts per unit	30	50	120
Direct labor hours per unit	4	5	7
Machine hours per unit	3	7	15
Production orders	50	70	200
Production Setups	20	50	50
Orders shipped	1,000	2,000	300
Number of Inspections	2	6	14

Required(Round all rates to two decimal places)

1. Determine the cost per set and the total production cost of each of the three customer groups using activity-based costing.

2. Determine the production cost for each of the three customer groups using FFIs current volume-based approach.

3. The activity usage data given in the problem reflects current usage of the various cost drivers to manufacture the firms product lines. Suppose you are given the following information regarding the firms practical capacity for each of these activities, as follows:

Cost Driver	Practical Capacity
# of Parts	990,000
# of Production Orders	800
# of Setups	200
Machine Hours	100,000
Direct Labor Hours	123,900
Number of orders shipped	5,000

Comment on how you would use this additional information for costing the firms products and assisting in strategic planning.

4. Compare the two approaches and discuss the strategic and competitive issues of using each of the two methods.