its a single question

PROBLEM 5-12 Assigning Overhead Cost to Products in ABC [LO1 - CC1, 2; LO2- CC3, 6, 7] CHECK FIGURE (2) Standard model unit product cost: $32.43 per unit "A dollar of gross margin per briefcase? That's ridiculous!" roared Art Dejans, president of CarryAll, Inc. Why do we go on producing those standard briefcases when we're able to make over $15 per unit on our specialty items? Maybe it's time to get out of the standard line and focus the whole plant on specialty work." Dejans is referring to a summary of average unit costs and revenues that he had just received from the company's accounting department: Standard Briefcases Specialty Briefcases Selling price per unit $40.00 $52.00 onn Con Accounting and Financial Management - MGMT8500 Standard Briefcases Specialty Briefcases Selling price per unit $40.00 $52.00 Unit product cost 38.00 35.50 Gross margin per unit 2.00 16.50 CarryAll produces briefcases from leather, fabric, and synthetic materials in a single plant. The basic product is a standard briefcase made from leather lined with fabric. The standard briefcase is a high-quality item and has sold well for many years. Last year, the company decided to expand its product line and produce specialty briefcases for special orders. These briefcases differ from the standard in that they vary in size, contain the finest synthetic materials, and have the buyer's name embossed on them. To reduce labour costs on the specialty briefcases, most of the cutting and stitching is done by automated machines. These machines are used to a much lesser degree in the production of standard briefcases. "I agree that the specialty business is looking better and better," replied Sally Henrie, the company's marketing manager. And there seems to be plenty of specialty work out there, particularly since the competition hasn't been able to touch our price. Did you know that Armour Company, our biggest competitor, charges over $65 a unit for its specialty items? Now that's what I call auoing the customer!" Accounting and Financial Management - MGMT8500 that's what I call gouging the customer!" A breakdown of the manufacturing cost for each of CarryAll's product lines follows: Standard Briefcases Specialty Briefcases Units produced each month 10,000 3,000 Direct materials: Leather 1.0 m2 $15.00 0.5 m2 $ 7.50 Fabric 1.0 m2 5.00 1.0 m2 5.00 Synthetic 5.00 Total materials 20.00 17.50 Direct labour 0.5 h a $16 8.00 0.5 h @ $16 8.00 Manufacturing overhead 0.5 h a $20 10.00 0.5 h @ $20 10.00 Unit product cost $38.00 $35.50 Manufacturing overhead is annlied to noducts on the hasic of direct labour-hour The rate of Manufacturing overhead is applied to products on the basis of direct labour-hours. The rate of $20 per direct labour-hour is determined by dividing the total manufacturing overhead cost for a month by the direct labour-hours: Manufacturing overhead cost, $130,000 Direct labour-hours, 6,500 $20 per DLH The following additional information is available about the company and its products. a. Standard briefcases are produced in batches of 200 units, and specialty briefcases are produced in batches of 25 units. Thus, the company performs 170 setups each month (50 setups for the standard items and 120 setups for the specialty items). A setup for the standard items requires one hour, whereas a setup for the specialty items requires two hours. b. All briefcases are inspected to ensure that quality standards are met. A total of 300 hours of inspection time is spent on the standard briefcases and 500 hours of inspection time is spent on the specialty briefcases each month. C. A standard briefcase requires 0.5 hours of machine time, and a specialty briefcase requires 2.5 hours of machine time. d. The company is considering using ABC as an alternative to its traditional costing system for computing unit product costs. Since these unit product costs will be used for external financial reporting, all manufacturing overhead costs are to be allocated to products, and d. The company is considering using ABC as an alternative to its traditional costing system for computing unit product costs. Since these unit product costs will be used for external financial reporting, all manufacturing overhead costs are to be allocated to products, and nonmanufacturing costs are to be excluded from product costs. The ABC system has already been designed and costs allocated to the activity cost pools. The activity cost pools and activity measures follow: Activity Cost Pool Activity Measure Estimated Overhead Cost Purchasing Number of orders $ 10,500 Materials handling Number of receipts 22,500 Production orders and setup Setup-hours Inspection 29,000 20,000 Inspection-hours Frame assembly Assembly-hours 13,000 Machine related Machine-hours _35,000 $ 130,000 Expected Activity Standard Briefcase Specialty Briefcase Activity Measure Total Number of orders: Leather 24 46 70 Fabric 51 79 130 Synthetic material 100 100 Number of receipts: Leather 46 14 60 Fabric 70 10 80 Synthetic material 160 160 Setup-hours ? ? ? Inspection-hours ? ? 2 Assembly-hours 650 650 1,300 Machine-hours ? ? ? Accounting and Financial Management - MGMT8500 Inspection-hours ? ? ? Assembly-hours 650 650 1,300 Machine-hours ? ? ? (Adapted from a case written by Harold P. Roth and Imogene Posey, "Management Accounting Case Study: CarryAll Company," Management Accounting Campus Report, Montvale, NJ: Institute of Management Accountants, Fall 1991, p. 9.) Required: 1. Using ABC, determine the amount of manufacturing overhead cost that would be applied to each standard briefcase and each specialty briefcase. 2. Using the data computed in Requirement (1) and other data from the case as needed, determine the unit product cost of each product line from the perspective of the ABC system. 3. Within the limitations of the data that have been provided, evaluate the president's concern about the profitability of the two product lines. Would you recommend that the company shift its resources entirely to production of specialty briefcases? Explain. 7. Henrie stated that the competition hasn't been able to touch our price" on specialty business. What do you think is the reason