The Cable Service Division reported the following activity for the month of March:

	Basic			Enhanced			Premium
Sales (units)		50,000			500,000			300,000
Price per unit		$32			$60			$90
Unit costs:
Directly traced		$6			$18			$36
Driver traced		$4			$8			$12
Allocated		$20			$26			$30

The unit costs are divided as follows: 70 percent production and 30 percent marketing and customer service. Direct labor cost is the only driver used for tracing. Typically, the division uses only production costs to define unit costs. The preceding unit product cost information was provided at the request of the marketing manager and was the result of a special study.

Bryce Youngers, the president of CTB, is reasonably satisfied with the performance of the Cable Service Division. March's performance is fairly typical of what has been happening over the past two years. The Phone Division, however, is another matter. Its overall profit performance has been declining. Two years ago, income before income taxes had been about 25 percent of sales. March's dismal performance was also typical for what has been happening this year and is expected to continue unless some action by management is taken to reverse the trend. During March, the Phone Division reported the following results:

Inventories: Materials, March 1: $23,000 Materials March 31: 40,000 Work in process, March 1: 130,000 Work in process, March 31: 45,000 Finished goods, March 1: 480,000 Finished goods March 31: 375,000 Costs: Direct Labor: 117,000 Plant and Equipment Depreciation: 50,000 Materials handling: 85,000 Inspections: 60,000 Scheduling: 30,000 Power: 30,000 Plant Supervision: 12,000 Manufacturing Engineering: 21,000 Sales Commissions: 120,000 Salary, sales supervisor: 10,000 Supplies: 17,000 Warranty Work: 40,000 Rework: 30,000 During March, the Phone Division purchased materials totaling $312,000. There are no significant inventories of supplies (beginning or ending). Supplies are accounted for separately from materials. CTB's Phone Division had sales totaling $1,170,000 for March.

Kim: "Foreign competition is eating us aliveselling phones at a lower price and high quality. If we could lower our prices by 10 to 15 percent, I think that wed regain most of our lost market share. But we also need to make sure that the quality of our products meets that of our competitors. We are spending a lot of money each month on inspection, rework, and warranties. Id like to see these costs cut by at least 50 percent. If we could do that by improving quality, then customers would be more satisfied with our products, and we would not only regain our market share but increase it."

Larry: They're right. If we could lower our prices by 10 to 15 percent, I think that we'd regain most of our lost market share. But we also need to make sure that the quality of our products meets that of our competitors. As you know, we are spending a lot of money each month on rework and warranties. That worries me. I'd like to see that warranty cost cut by 70 to 80 percent. If we could do that, then customers would be more satisfied with our products, and I bet that we would not only regain our market share but increase it.

Jacob: I have already been gathering data. I could probably have a report within two weeks.

MEMO To: Kim Breashears From: Jacob Carder Subject: Preliminary Analysis Based on my initial analysis, I am confident that an ABC system will offer significant improvement. For one of our conventional phone plants, I regressed total monthly overhead cost on monthly direct labor cost using the following 15 months of data:

Overhead: 360,000 300,000 350,000 400,000 320,000 380,000 300,000 280,000 340,000 410,000 375,000 360,000 340,000 330,000 300,000

Direct Labor Cost: 110,000 100,000 90,000 100,000 90,000 100,000 90,000 90,000 95,000 115,000 100,000 85,000 85,000 90,000 80,000

The results were revealing. Although direct labor cost appears to be a driver of overhead cost, it really doesn't explain a lot of the variation. I then searched for other driversparticularly non-unit driversthat might offer more insight into overhead cost behavior. Every time a batch is produced, material movement occurs, regardless of the size of the batch. The number of moves seemed like a more logical driver. I was able to gather only 10 months of data for this. (Our information system doesn't provide the number of moves, so I had to build the data set by interviewing production personnel.) This information is provided next: Materials Handling Cost: 80,000 60,000 70,000 72,000 65,000 85,000 67,000 73,500 83,000 84,000

Number of Moves: 1,500 1,000 1,250 1,300 1,100 1,700 1,200 1,350 1,400 1,700 Kim, you expressed the desire of reducing the costs of inspection, reworking, and warranties. In addition to the pilot study for one plant, I also collected information about these three activities for the division. For the inspection activity, we have 15 inspectors who are paid an average of $4,000 per month. Each inspector offers a practical inspection capacity of 2,000 hours per year. However, it appears that inspectors actually work only about 80 percent of those hours. Rework cost is simply the cost of replacing some faulty components and the associated direct labor. The rework cost per unit is predictable and constant per unit regardless of the product model. Warranty cost, on the other hand, involves the salaries of two technicians, with the remaining cost, the cost of replacement components, which is relatively constant per unit repaired. The technicians are paid $5,000 per month and provide 2,000 hours of service per year. Warranty service usually requires 3,600 technician hours per year.

Pursuant to the request, Jacob produced the following cost and driver information:

Activity	Expected Cost				Driver		Activity Capacity
Other activities		$2,000,000			Direct labor dollars			$1,250,000
Moving materials		900,000			Number of moves			18,000
Inspecting		720,000			Inspection hours			24,000
Reworking		380,000			Rework hours			3,800
Total overhead cost		$4,000,000

Expected activity demands:

	Regular Model			Deluxe Model
Units completed		100,000			40,000
Direct labor dollars		$875,000			$375,000
Number of moves		7,200			10,800
Inspection hours		6,000			18,000
Rework hours		1,900			1,900

Required:

1. Answer the following regarding the product costing system of the Cable Service Division:

a. Complete the following table with the appropriate product costs for the Cable Service Division: Round the answers to two decimal places.

	Basic	Enhanced	Premium
Product cost for pricing
Product cost for cost of services sold

2. Prepare an income statement for the Cable Service Division for March.

a. Formula one, Direct labor cost formula:3. Using a regression program such as Microsoft Excel, calculate two cost formulas: (1) overhead using direct labor cost as the driver and (2) materials handling cost using number of moves as the driver. Based on the outcomes, answer the following: Round the intercept to the nearest dollar and round the slope to the nearest cent.

Y = ______ + _______ X

Intercept (rounded to nearest dollar): $_________

Slope (Coefficient 1, rounded to the nearest cent): $________

R Square (rounded to two decimal places): $________

b. Formula for material handling cost (based on number of moves): Y = _______ + ________ X

Intercept (rounded to nearest dollar): $_________

Slope (Coefficient 1, rounded to the nearest cent):$_______

R Square (rounded to two decimal places): $________