Several years after reengineering its production process, ZippyZippy Corporation hired a new controller, Jane SmithJane Smith She developed an ABC system very similar to the one used by ZippyZippy's chief rival, SouthstreamSouthstream Part of the reason SmithSmith developed the ABC system was because ZippyZippy'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, ZippyZippy had used a plantwide overhead rate based on direct labor hours that was developed years ago Manufacturing Overhead Costs per Unit Standard Deluxe ABC costs $199 50 $372 50 Plantwide overhead rate $237 60 $334 40 The following data are budgeted for the company's Standard and Deluxe models for next year Standard Deluxe Sales price per wheel $490 00 $640 00 Direct materials per wheel $33 00 $46 25 Direct labor per wheel $45 20 $51 00 1 Compute the gross profit per wheel if managers rely on the ABC unit cost data 2 Compute the gross profit per wheel if the managers rely on the plantwide allocation cost data 3 Which product line is more profitable for ZippyZippy 4 Why might the controller have expected ABC to pass the cost benefit test Were there any warning signs that Zippy'sZippy's old direct labor based allocation system was broken

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Several years after reengineering its production process, ZippyZippy Corporation hired a new controller, Jane SmithJane Smith. She developed an ABC system very similar to the

Several years after reengineering its production process,

ZippyZippy

Corporation hired a new controller,

Jane SmithJane Smith.

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

ZippyZippy's

chief rival,

SouthstreamSouthstream.

Part of the reason

SmithSmith

developed the ABC system was because

ZippyZippy'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,

ZippyZippy

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

Manufacturing Overhead Costs per Unit
	Standard	Deluxe
ABC costs. . . . . . . . . . . . . . . .	$199.50	$372.50
Plantwide overhead rate. . . . . .	$237.60	$334.40

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

	Standard	Deluxe
Sales price per wheel. . . . . . .	$490.00	$640.00
Direct materials per wheel. . . .	$33.00	$46.25
Direct labor per wheel. . . . . . .	$45.20	$51.00

1.	Compute the gross profit per wheel if managers rely on the ABC unit cost data.
2.	Compute the gross profit per wheel if the managers rely on the plantwide allocation cost data.
3.	Which product line is more profitable for ZippyZippy?
4.	Why might the controller have expected ABC to pass the cost-benefit test? Were there any warning signs that Zippy'sZippy's old direct-labor-based allocation system was broken?