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Managers are considering about activity-based costing system, and have gathered the following information about the expected manufacturing overhead costs for next year. Assume annual product

Managers are considering about activity-based costing system, and have gathered the following information about the expected manufacturing overhead costs for next year. Assume annual product and sales volume remains the same for future years.

Table 3. Information for Activity- based Costing System

Units of the cost driver

Activity Centers & Cost Drivers

Costs

Product A

Product B

Center 1 (number of rooms)

$900,000

300,000

1,200,000

Center 2 (number of shipments)

$800,000

4,800

15,200

Center 3 (number of inspections)

$1,200,000

21,000

59,000

Center 4 (number of orders)

$800,000

110,000

50,000

Center 5 (number of hours)

$100,000

16,000

176,000

Center 6 (number of set-ups)

$1,000,000

4,000

6,000

Part A.

(1) Assign the per unit and total overhead costs to each product, based on activity-based costing system. (8 points) (2) Calculate the per unit and total manufacturing costs for each product based on activity-based costing system. (4 points)

Part B.

Based on the overhead costs assigned using activity-based costing system, (1) Re-prepare the income statement, using the format in Table 2 and assuming the same selling and admin expenses. (6 points) (2) Calculate the profit margin ratio (i.e., profit margin / sales) and net profit per unit, and compare the profitability of the two products (4 points). (3) Based on your calculations, update your suggestions to the managers (3 points)

Table 2. Company X Income Statement 2019

Income Statement
Year Ended Dec. 31, 2019
Product A Product B Total
Sales (4,000 * $1,260 each); (22,000 * $900 each) $5,040,000 $19,800,000 $24,840,000
Less: Cost of Goods Sold ($940*4,000); ($720 * 22,000) ($3,760,000) ($15,840,000) ($19,600,000)
Gross Margin $1,280,000 $3,960,000 $5,240,000
Less: Selling and administrative expenses ($780,000) ($264,000) ($1,044,000)
Net Profit (a) $500,000 $3,696,000 $4,196,000
Units produced and sold (b) 4,000 22,000
Net Profit per unit (a / b) $125 $168

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