Superior Door Company (SDC) manufactures and sells two main product lines, interior doors and exterior doors. Its products are sold through industry and wholesale suppliers. SDC's products are known for their quality and value, and are often priced lower than competing brands. During a recent executive meeting, Jerry Rhodes, the vice president of marketing, made three observations: First, the price of the interior door (ID), a high-volume product for the firm, is often higher than that of competitors' products. Second, SDC has been struggling to maintain its market share of ID. Third, the firm has sold approximately the same number of units of its exterior door (ED), a high-margin product, despite a 7.5 percent increase in price. Noting that the profit margin per unit of ED is higher than that of ID, Rhodes has suggested that SDC should push for producing and selling ED. Regina Jones, the plant manager, objected to this strategy because the manufacturing processes of ED were much more complicated than those for ID. The total manufacturing costs would increase substantially if SDC shifted its product line to emphasize ED. Joseph Higgins, the vice president of finance, observes that SDC uses a direct-labor cost-based system to determine the amount of manufacturing overhead for all of its products. Selected operating data for the year 2010 follow:

 

		Cost per Unit
Product	Units Sold	Direct Materials	Direct Labor		Selling Price per Unit
ED	5,000	$40	$24		$150
ID	50,000	$30	$12		$80

Joseph also has collected the following data on activity cost pools and their cost drivers:

 

Cost Pools/Activities	Cost Drivers
Machine operation	Machine-hours
Support labor overhead	Direct labor costs
Machine setup	Setup hours
Assembly	Number of operators
Inspection	Inspection hours

 

Estimated Overhead Costs and Activity Consumption Information
		Activity Consumption Levels
Activity Cost Pool		Overhead	Total Activity	ED	ID
Machine operation		$200,000	10,000	2,500	7,500
Support labor overhead		$150,800	$ 720,000	$ 120,000	$ 600,000
Machine setup		$82,500	2,500	1,200	1,300
Assembly		$140,875	402,500	192,500	210,000
Inspection		$66,250	4,000	1,800	2,200
Total		$640,425

Joseph explained why these cost drivers were appropriate:

The overhead costs for machine operation had nothing to do with direct labor-hours. These costs were more likely to vary with the number of machine-hours.

The support labor included allowances for benefits, break periods, and costs related to the supervising and engineering staff. This overhead was indirect to the products but was related to the direct labor costs.

The setup overhead was generated by changing the job to be run and should be related to the setup hours rather than the direct labor-hours.

The assembly overhead related to costs incurred for the cutting, trimming, and sanding operations. Therefore, the correct cost driver should be the number of operations.

The inspection overhead arose from inspecting the finished goods. The higher the number of finished units, the higher the inspection overhead costs. The appropriate cost driver should be the number of hours spent on the inspection.

Required

1. Using the current costing system, which uses direct labor costs as the basis to determine overhead costs, calculate the unit manufacturing costs of the two products.

2. Using the activity-based costing system, calculate the unit manufacturing costs of the two products.

3. Under ABC, is the exterior door line as profitable as the vice president of marketing thinks it is under the existing costing system?

4. Evaluate the marketing vice president's suggestion to shift the sales mix in favor of exterior doors.

5. Give at least two reasons for the differences between the results for the two different costingsystems.