Leisure Time manufactures two models of bicycles, Road Bike and Mountain  bike.  Road bikes sell to retailers for $475 per bike.  Mountain bikes sell to retailers for $525 per bike. Due to changes to add electric bikes to production the company may have to discontinue the least profitable product (either mountain or road bike).  Leisure has always used a plant-wide manufacturing rate.

Direct labour hours are used to allocate the overhead to each product:

 

	Road	Mountain
Number of units produced and sold	10,000	12,500
Direct materials per unit	$80	$120
Direct labour per unit	$75	$85

 

          

Activity Cost Pool	Budgeted Overhead Costs	Cost Driver	Cost driver Budgeted Level
			Road	Mountain
Cutting	$2,400,000	Number of pieces	80,000	120,000
Spraying	$ 660,000	Number of bikes	10,000	12,000
Assembly	$1,600,000	Direct labour hours	50,000	50,000
Total	$4,660,000

 

a. Compute the plantwide rate.

b. Using the plantwide rate allocate overhead to each product.

c.  Calculate the budgeted profitability for each unit of the two models, using plantwide rate.  What product do you suggest should be discontinued?
 

d. Compute overhead rates for each cost pool using activity-based costing and allocate to each product?
 

e. Calculate the budgeted profitability for each unit of the two models using the activity-based-costing (ABC) method. What product do you suggest should be discontinued?
 

f. Provide two reasons a company prefer using an ABC system and two reasons to  use a plantwide allocation rate?