Question: Classic Cabinets has a factory that produces custom kitchen cabinets. It has multiple product lines.

Materials and labor for the cabinets are determined by each job. To simplify the assignment, we will assume the following average costs.

The materials include $1,500 for the wood and other materials on a per job basis. It requires 20 hours of labor on average for a custom kitchen. The hourly rate is $12. The sales price will be set at a markup of 85%.

The company estimates that it will have 16,000 direct labor hours in total for the kitchen cabinets.

It assumes 800 units are sold on average per year. A breakdown of estimated yearly costs related to the kitchen cabinets follows:

Salaries- office & administrative $ 520,000

Salaries for factory personal $ 220,000

Office Rent $ 125,000

Factory Rent $ 20,000

Utilities and Misc office expenses(based on units sold) $ 20,000

Travel(based on units sold) $ 24,000

Insurance - office $ 14,000

Depreciation - office equipment $ 45,000

Depreciation for factory equipment $ 70,000

Advertising $ 20,000

Sales commissions(based on units sold) $ 45,000

Factory Property taxes $ 10,000

Maintenance for factory equipment $ 80,000

1) On the bottom is my calculation for the following question.

Use a CVP Income Statement with modeled changes.

Assume you are selling the 800 units.

If the following changes were to be made, calculate a new CVP Income Statement: Direct Material costs decrease by 10%; fixed costs increase by 15% and sales price would increase by 5%.

2) Can you elaborate on this question, especially the ABC portion?

Explain what will happen to the MOH costs on a per unit basis if fewer units are sold. If another product line that would share the MOH costs was added, how would it impact the MOH costs?

Should ABC be considered? If so, what are the pertinent points and show calculations needed to support it.

Note: Here is an answer from a previous tutor, but I do not understand.

"If fewer no.of units are sold, there may be ending inventories and if variable costing is followed ,(CVP) (unlike in full/absorption costing) most of the MOH that are fixed will be deferred in closing stock . This will impact the per unit cost which will consist of only variable mfg. costs. If different product lines are launched, MOH will be spread over and needs to be allocated - when activity-wise allocation for the products will be accurate, even though initially time-consuming & expensive."