I'm having trouble with the second case study, Case Study 5-32 within the attached on the second page

1 Managerial Accounting LP-2 Seminar 2 Managerial Accounting LP-2 Seminar Case Study 4-51 Practical capacity, cost driver rates, and the death spiral: Youngsborough Products a supplier to the automotive industry had seen its operating margins shrink below 20% as its customers put continued pressure on pricing. Youngsborough produced four products in its plant and decided to eliminate products that no longer contributed positive gross margins. The total plant overhead cost is $122,000 per year. Details on the four products are provided here. _____PRODUCTS_______ A B C Product volume (units) 10,000 8,000 6,000 4,000 Selling Price $15.00 $18.00 $20.00 $22.00 Materials per unit $4.00 $5.00 $6.00 $7.00 Direct labor hours per unit- 0.24 Total direct labor hours 2,400 0.18 1,440 D__________ 0.12 720 0.08 320 Youngsborough calculates a plantwide overhead rate by dividing total direct labor hours into total overhead costs. Assume that plant overhead is a fixed cost during the year, but that direct labor is a variable cost. The direct labor rate is $30 per hour. A. Calculate the plantwide cost driver rate and use this rate to assign overhead costs to products. Calculate the gross margin for each product and calculate the total gross margin. B. If any product is unprofitable in part A, drop this product from the mix. Recalculate the cost driver rate based on the new total direct labor hours remaining in the plant and use this rate to assign overhead costs to the remaining three products. Calculate the gross margin for each product and calculate the total gross margin. C. Drop any product that is unprofitable with the revised cost assignment. Repeat the process, eliminating any unprofitable products at each stage. D. What is happening at Youngsborough and why? How could this situation be avoided? 3 Managerial Accounting LP-2 Seminar Solutions to Case Study 4-51 below My solution is as follows: given that the total plant wide overhead costs are $122,000 per year. Using this figure and a cost driver of direct labor hours we can calculate the cost driver rate as: 122,000 / (2400+1440+720+320) = $25.00 While using this calculation as well as multiplying each product volume by its price and corresponding materials and direct labor cost, we can add the following lines to the chart to calculate gross margin: Revenue per product $150,000 $144,000 $120,000 $88,000 Overhead costs per product $60,000 $36,000 $18,000 $8,000 Total Materials Cost $40,000 $40,000 $36,000 $28,000 Total Labor Costs @ 30.00/hr $72,000 $43,200 $21,600 $9,600 Gross Margin: ($22,000) $24,800 $44,400 $42,400 Total Gross Margin: $89,600 The second question is as follows: If any product is unprofitable in part a, drop this product from the mix. Recalculate the cost driver rate based on the new total direct labor hours remaining in the plant and use this rate to assign overhead costs to the remaining three products. Calculate the gross margin for each product and calculate the total gross margin. As can clearly be seen, product A is lacking. Therefore, the following modified information can be calculated based on the new cost driver rate of: 122,000 / (1440+720+320) = $49 4 Managerial Accounting LP-2 Seminar Revenue per product $144,000 $120,000 $88,000 Overhead costs per product $70,560 $35,280 $15,680 Total Materials Cost $40,000 $36,000 $28,000 Total Labor Costs @ 30.00/hr $43,200 $21,600 $9,600 Gross Margin: ($9,760) $27,120 $34,720 Total Gross Margin $52,080 The third question asks us to continue this process by dropping the next unprofitable item and repeating: 122,000 / (720+320) = $117 Revenue per product $120,000 $88,000 Overhead costs per product $84,240 $37,440 Total Materials Cost $36,000 $28,000 Total Labor Costs @ 30.00/hr $21,600 $9,600 Gross Margin: $27,120 $34,720 Total Gross Margin ($21,840) $12,960 The final question asks us to surmise the problem, what is happening here and what could be done to avoid it. Essentially, the company is in a death spiral. By attempting to drop unprofitable products and assign the costs to more profitable ones, the company is artificially driving themselves out of the market. The solution is not dropping products but creating a pricing strategy that mitigates these losses. The first step is to assign costs based on a driver, as was done in step one. Once direct costs are correct, pricing strategies must be employed. Perhaps the company should require minimum orders, 5 Managerial Accounting LP-2 Seminar increase pricing or find efficiencies in costs for product A. Regardless of the strategy used; dropping the product altogether has been shown to be the least desirable solution. 6 Managerial Accounting LP-2 Seminar Case Study 5-32 Part proliferation: role for activity-based costing: An article in the Wall Street Journal by Neal Templin and Joseph B. White (June 23, 1993) reported on the major changes occurring at General Motors. Its new chief executive officer, John Smith, had been installed after the board of directors requested the resignation of Robert Stempel, the previous chief. John Smith's North American Strategy Board identified 30 components that could be simplified for 1994 models. GM had 64 different versions of the cruise control/turn signal mechanism. It planned to reduce that to 24 versions the next year and the following year to just 8. The tooling for each one cost GM's A.C. Rochester division about $250,000. Smith said, \"We've been talking about too many parts doing the same job for 25 years, but we aren't focused on it.\" (Note that the tooling cost is only one component of the cost of proliferating components. Other costs include the design and engineering costs for each different component, purchasing costs, setup and scheduling costs, plus the stocking and service costs for every individual component in each GM dealership around the United States). GM's proliferation of parts was mind-boggling. GM made or bought 139 different hood hinges, compared with one for Ford. Saginaw's Plant Six juggled parts for 167 different steering columns- This approach increased GM's costs exponentially. Not only did the company pay far more for engineers than competitors did to design steering columns, but it also needed extra tools and extra people to move parts around, and it suffered from quality glitches when workers confused one steering column with another. A. How could an inaccurate and distorted product costing system have contributed to the over proliferation of parts and components at General Motors? B. What characteristics should a new cost system have that would enable it to signal accurately to product designers and market researchers about the cost of customization and variety