Franklin Furniture Incorporated (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 quality 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 changes. FFI has used a volume-based overhead allocation rate based on direct labor hours for some time. Direct labor cost is $19 per hour. Budgeted Cost Cost Driver Materials handling $ 402, cee Number of parts Product scheduling 169,60 Number of production orders Setup labor 246,200 Number of setups Automated machinery 1,662,588 Machine hours Finishing 662,900 Direct labor hours Pack and ship 336,900 Number of orders shipped $ 3,480, 180 General, selling, and administrative costs $ 4,680,000 The budgeted production data for the three product lines follow. Product Lines Sets produced Price Direct materials cost per set Number of parts per set Direct labor hours per set Machine hours per set Production orders Production setups Orders shipped Number of inspections Value 12,980 $ 590 $ se 40 4 3 se 2e 1,880 Quality 5,180 $ 840 $ 70 be 5 7 70 se 2,880 Luxury 620 $ 1,140 $ 130 12e 7 15 200 se 380 14 Required: 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 FFI's current volume-based approach. (For all requirements, round your intermediate calculations and final answers 2 decimal places.) Value Quality Luxury Unit ABC cost Volume-based cost (per unit) Required: 3. Compare the two approaches and discuss the strategic and competitive issues of using each of the two methods. 4. The activity usage data given in the problem reflects current usage of the various cost arvers to manufacturethe firm's product lines. Suppose you are given the following information regarding the firm's practical capacity for each of these activities, as follows: Cost Driver Practical Capacity Number of parts 1,128,62 Number of production orders Bee Number of setups 200 Machine hour's 119,00 Direct labur hours 115,280 Number of order's shipped 4.ee Compute the new activity rates using practical capacity and comment on how you would use this additional information for costing the firm's products and assisting in strategic planning
