Problem
Parent's Helpers manufactures the Smoothie and the Low-rider for the upper end of the baby stroller market. The Smoothie has annual sales of 50,000 units, and the Low-rider realizes annual sales of 10,000 units. Each buggy requires 2.50 hours of direct labor. Costs for direct material are Smoothie at $30.00 and Low-rider at $45.00. The total manufacturing indirect cost is $3 million per year, and direct-labor wages and benefits are $12.00 per hour. The Low-rider has a special design that requires more precision manufacturing processes, higher inspection tolerances, more engineering and drafting support, and more complex setups, tooling, and featuring. It is manufactured in small lots, which requires a larger number of production orders.
(a) Calculate the total unit manufacturing cost for each design using direct-labor hours as a burden vehicle.
(b) Mr. Squiggles, the CEO, just returned from an ABC seminar and directed you, his cost engineer, to calculate the unit manufacturing cost using ABC.
(c) Compare the results of (a) and (b). If selling price is set at 130% of total unit manufacturing cost, what are the consequences of relying on traditional absorption costing?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.