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Question 3 Halifax Shoes, Inc. makes several types of shoes but two particular models have come to the attention of Marion, senior vice-president of sales.

Question 3

Halifax Shoes, Inc. makes several types of shoes but two particular models have come to the attention of Marion, senior vice-president of sales. She has noticed that the company recently has been increasing its market share for the high-quality Boomer Boots (BB) but losing market share for the highly competitive Lazy Loafers (LL). Marion found Halifaxs prices were lower than its competitors for BB but slightly higher for LL. She did not understand the reasons for the price differences because all companies use similar production technology.

Halifaxs manufacturing facility has a cutting department and an assembly department. The high-quality BB is produced in small batches (1,000 pairs of shoes each) and the lower-quality LL is produced in larger batches (3,000 pairs each). Marion has asked you, the companys new controller, to analyze the product costing method to see if the product prices should be changed.

The company currently uses a plant-wide cost driver rate based on direct labour hours.

Your assistant has provided you with the following additional information about the production of a typical batch of BB and LL:

Each batch of BB (1,000 pairs)

Item

Cutting

Assembly

Total

Direct labour hours

80

120

200

Machine hours

80

60

140

Setup hours

3

2

5

Direct costs

$7,500

$6,000

$13,500

Each batch of LL (3,000 pairs)

Item

Cutting

Assembly

Total

Direct labour hours

110

150

260

Machine hours

100

90

190

Setup hours

1

1

2

Direct costs

$12,000

$10,200

$22,200

Your assistant has traced the total support costs of $1,200,000 to the two service departments and the two production departments and has identified the following details for potential cost drivers for the service departments:

Item

Maintenance

Personnel

Cutting

Assembly

Total

Support costs

$405,080

$154,920

$440,000

$200,000

$ 1,200,000

Direct labour hours

0

0

18,000

21,470

39,470

Machine hours

0

0

13,900

10,800

24,700

Setup hours

0

0

340

180

520

Your assistant has also collected the following information on activities and their cost drivers:

Support activities

Cost

Cost driver

Maintenance

$405,080

Total Machine hours

Personnel

154,920

Total Direct labour hours

Cutting supervision

280,000

Setup hours in Cutting

Cutting depreciation

160,000

Machine hours in Cutting

Assembly supervision

160,000

Direct labour hours in Assembly

Assembly depreciation

40,000

Setup hours in Assembly

Required:

  1. Determine the costs per pair of BB and LL using a single plant-wide cost driver rate based on direct labour hours.
  2. Determine the costs per pair of BB and LL using ABC.
  3. Halifax Shoes uses a 120% markup on manufacturing costs to determine their selling prices. Calculate the selling price for each type of shoe based on the current costing method.
  4. If the price was changed to reflect the revised ABC costing approach, would there be a significant change? Why do you think market share for BB has been increasing but decreasing for LL?

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