Question 5: Activity Based Costing (20 marks in total)

Come-On-In company produces two types of entry doors: Standard and Deluxe. The assignment basis for manufacturing overheads has been direct labour hours. For 2016, the company complied the following data for the two products:

		Standard		Deluxe
Sales units		400,000 Doors		50,000 Doors
Sales price per unit		$ 475		$ 690
Direct material cost per unit		$ 90		$ 120
Direct labour cost per unit		$ 40		$ 60
Manufacturing overhead cost per unit		$ 120		$ 80

During 2016, the company purchased a state-of-art robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. The information gathered is as follows:

Activity	Cost Driver	Standard	Deluxe	Total	Cost
Setups	Number of setups	100	400	500	$ 2,900,000
Machine-related	Number of machine hours	300,000	300,000	600,000	$ 44,100,000
Packing	Number of shipments	200,000	50,000	250,000	$ 5,000,000

Required:

5a. Using the current cost system, determine the total cost of manufacturing one unit of each product and the profit per unit for each product.

5b. Under the current cost system, estimated manufacturing overhead per unit are less for the deluxe door ($80) than the standard door ($120). What is a likely explanation for this?

5c. Using the activity-based costing data, compute the cost driver rate for each overhead activity.

5d. Compute the revised manufacturing overhead cost per unit for each type of product.

5e. Is the deluxe door as profitable as the original data estimated using previous cost system? Why or why not? Explain.