Question 2

The Dairy Division of BMC, located in the city of Colac, operates at capacity, and considers applying ABC analysis to three product lines within its division: full cream milk, skim milk, and almond milk. The manager of this division identifies four activities, and their activity cost allocation rates as follows:

Using a division-wide allocation rate, the Dairy Division of BMC allocated manufacturing overhead to the three products at the rate of 30% of direct manufacturing cost.

1. c) The division expects that, in the year 2022, there will be no freezing activity because the division wants to sell the products as fresh as possible. The division wants to manufacture the products at a smaller batch each time so there is an increase of set up activities for every product line as below.

Table 3 Dairy Division, year 2022

If everything else is equal (activity cost allocation rate, direct manufacturing cost, and sales revenue for all three products remain the same), provide the annual change of gross margin under ABC for each product (i.e., total gross margin under ABC in 2022 minus total gross margin under ABC in 2021).(Chapter 11, 6 marks)

Ordering $100 per purchase order Machine set up $75 per set up Freezing $5 per hour Packaging $0.15 per item sold The revenues, cost of goods sold, and activity usage of the three product lines are as follows: Table 2 - Dairy Division, year 2021 Year 2021 Full Cream Skim Almond Financial data Revenues $250,000 $150,000 $75,000 Direct manufacturing cost $40,000 $25,000 $15,000 Manufacturing overhead allocated ? ? ? Activity area usage (cost-allocation base) Ordering (purchase orders) 200 100 Machine set up (setups) 90 35 Freezing (hours) Packaging (items sold) 100,000 60,000 8,000 60 30 190 180 40 Activity Ordering Machine set up Freezing Packaging Full Cream 200 140 0 100,000 Skim 100 110 0 60,000 Almond 60 120 0 8,000