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Question 5: Activity Based Costing Come-On-In company produces two types of entry doors: Standard and Deluxe. The assignment basis for manufacturing overheads has been direct

Question 5: Activity Based Costing

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.

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