Kallapur Company manufactures two products: KAP1, which sells for $120; and QUIN, which sells for $220. Estimated cost and production data for the current year are as follows:

		KAP1		QUIN
Direct materials cost		$30		$45
Direct labor cost (@ $12/hr)		$24		$60
Estimated production (units)		25,000		15,000

In addition, fixed manufacturing overhead is estimated to be $2,000,000 and variable overhead is estimated to equal $3 per direct labor hour. Kallapur desires a 15 percent return on sales for all of its products.

Instructions

a.	Calculate the target cost for both KAP1 and QUIN.

b-1.	Estimate the total manufacturing cost per unit of each product if fixed overhead costs are assigned to products on the basis of estimated production in units.

b-2.

Which of the products is earning the desired return?

	KAP1
	QUIN

c-1.	Recalculate the total manufacturing cost per unit if fixed overhead costs are assigned to products on the basis of direct labor hours.

c-2.

Which of the products is earning the desired return?

	KAP1
	QUIN

d.	On the basis of the confusing results of parts b and c, Kallapur's manager decides to perform an activity analysis of fixed overhead. The results of the analysis are as follows:

				Demands
Activity		Costs	Driver	KAP1		QUIN
Machine set-ups	$	400,000	# of set-ups	100		400
Purchase orders		600,000	# of orders	200		100
Machining		500,000	# of machine-hours	2,000		6,000
Inspection		200,000	# of batches	50		30
Shipping to customers		300,000	# of shipments	300		200
Total fixed overhead	$	2,000,000

d-1.	Estimate the total manufacturing cost per unit of each product if activity-based costing is used for assigning fixed overhead costs. (Round your intermediate calculations and final answers to 2 decimal places.)

d-2.

Under this method, which product is earning the desired return?

	KAP1
	QUIN

f-1.

Kallapur's production manager believes that design changes would reduce the number of set-ups required for QUIN to 25. Fixed overhead costs for set-ups would remain unchanged. What will be the impact of the design changes on the manufacturing costs of both products? (Round your intermediate calculations and final answers to 2 decimal places.)

f-2.

Which of the products will earn the desired return?

	KAP1
	QUIN

g-1.

An alternative to the design change is to purchase a new machine that will reduce the number of set-ups for KAP1 to 20 and the number of set-ups for QUIN to 80. The machine will also reduce fixed set-up costs to $200,000. Calculate the manufacturing costs for each product if the machine is purchased. (Round your intermediate calculations and final answers to 2 decimal places.)

g-2.

Should Kallapur purchase the new machine?

	Yes
	No