Several years after reengineering its production process,

King

Corporation hired a new controller,

Barb Joe.

She developed an ABC system very similar to the one used by

King's

chief rival. Part of the reason

Joe

developed the ABC system was because

King's

profits had been declining even though the company had shifted its product mix toward the product that had appeared most profitable under the old system. Before adopting the new ABC system,

King

had used a plantwide overhead rate based on direct labor hours that was developed years ago.

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Part 1

Requirement 1. Compute the gross profit per wheel if managers rely on the ABC unit cost data. (Enter amounts to two decimal places.)

Begin by computing the total manufacturing cost per wheel for each wheel model.

King Corporation
Total cost per unit using ABC data
	Standard	Deluxe
Total manufacturing cost

Part 2

Now compute the gross profit per wheel for each wheel model.

King Corporation
Gross profit per unit using ABC data
	Standard	Deluxe
Gross profit

Part 3

Requirement 2. Compute the gross profit per wheel if the managers rely on the plantwide allocation cost data.

Begin by computing the total manufacturing costs. (Enter amounts to two decimal places.)

King Corporation
Total cost per unit using plantwide overhead rate
	Standard	Deluxe
Total manufacturing cost

Part 4

Now compute the gross profit per wheel for each wheel model if the managers rely on the plantwide allocation cost data. (Enter amounts to two decimal places.)

King Corporation
Gross profit per unit using plantwide overhead rate
	Standard	Deluxe
Gross profit

Part 5

Requirement 3. Which product line is more profitable for the company?

Using the new ABC system, the standard model is

just as profitable as

less profitable than

more profitable than

the deluxe model. Activity-based costing data generally are

just as accurate as

less accurate than

more accurate than

cost data generated by a plantwide overhead allocation rate. ABC systems have

less

more

the same

cost categories (activities), each with its own allocation base. ABC cost assignments

do not accurately

less accurately

more accurately

represent the cost of resources consumed to manufacture (and support) products.

Part 6

Requirement 4. Why might the controller have expected ABC to pass the cost-benefit test? Were there any warning signs that the company's old direct-labor-based allocation system was broken?

The ABC system is likely to pass the cost-benefit test because

King

Corporation manufactures

identical products that use the same amount of resources

two different products that use different amounts of resources

. The old cost system appears "broken" because profits have been declining even though the company

increased marketing efforts

raised the selling price of it's products

shifted its product mix toward the product that had appeared most profitable under the old system

.

Data table

Manufacturing Overhead Costs per Unit:

	Standard	Deluxe
ABC costs. . . . . . . . . . . . . . . . .	$184.00	$309.00
Plantwide overhead rate. . . . .	$221.00	$272.00

The following data are budgeted for the company's Standard and Deluxe models for next year:

	Standard	Deluxe
Sales price per wheel. . . . . . . .	$490.00	$620.00
Direct materials per wheel. . . .	$34.50	$48.25
Direct labor per wheel. . . . . . . .	$45.00	$54.00

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