Gamma Automotive Parts Manufacturing

Scenario: Product Costing and Allocation

Product Details:

• Product A:
  • Direct Materials: $20 per unit
  • Direct Labor: $10 per unit
  • Variable Manufacturing Overhead: $5 per unit
  • Fixed Manufacturing Overhead: $50,000 per year

• Product B:
  • Direct Materials: $30 per unit
  • Direct Labor: $15 per unit
  • Variable Manufacturing Overhead: $7 per unit
  • Fixed Manufacturing Overhead: $70,000 per year

Requirements:

1. Total Product Cost Calculation:
   • Calculate the total manufacturing cost per unit for both Product A and Product B, including direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead allocation based on production volume.

1. Activity-Based Costing (ABC) Analysis:
   • Apply activity-based costing principles to allocate fixed manufacturing overhead costs to Product A and Product B. Discuss the advantages of using ABC for more accurate product costing.

1. Cost Allocation and Pricing Strategy:
   • Develop a pricing strategy for Product A and Product B that ensures profitability while considering the allocated manufacturing costs. Justify your pricing decisions with a cost-volume-profit analysis.

1. Cost-Effectiveness Analysis:
   • Analyze the cost-effectiveness of outsourcing the production of Product B to a third-party manufacturer versus continuing in-house production. Consider both qualitative and quantitative factors in your analysis.

1. Strategic Cost Management Recommendations:
   • Provide strategic recommendations to Gamma Automotive Parts Manufacturing for optimizing manufacturing costs, improving cost allocation accuracy, and enhancing overall profitability.