Most of the company's sales are from has been a standard in the industry for several years; the market for this product is competitive and price sensitive. Casito plans to sell 65,000 of Product #347 in 2011 at a price of $150 per unit. Product #658 is a recent addition to Casto's product line. This product incorporates the latest technology and can be sold at a premium price; the company expects to sell 40,000 units of this product in 2011 for $300 per unit.
Casto's management group is meeting to discuss 2011 strategies, and the current topic of conversation is how to spend the sales and promotion budget. The sales manager believes that the market share for Product #347 could be expanded by concentrating Casto's promotional efforts in this area. However, the production manager wants to target a larger market share for Product #658. He says, "The cost sheets I get show that the contribution from Product #658 is more than twice that from Product #347. I know we get a premium price for this product; selling it should help overall profitability." Casto has the following costs for the two products:
Product #347 Product#658
Direct Material $80 $140
Direct labor 1.5 hours 4 hours
Machine time 0.5 hours 1.5 hours
Variable manufacturing overhead is currently applied on the basis of direct labor hours. For 2011, variable manufacturing overhead is budgeted at $1,120,000 for a total of 280,000 direct labor hours. The hourly rates for machine time and direct labor are $10 and $14, respectively. Casto applies a material handling charge at 10 percent of material cost; this material handling charge is not included in variable manufacturing overhead. Total 2011 expenditures for materials are budgeted at $10,800,000.
Mark Alex, Casto's controller, believes that before management decides to allocate marketing funds to individual products, it might be worthwhile to look at these products on the basis of the activities involved in their production. Alex has prepared the following schedule to help the management group understand this concept:
Budgeted Cost Cost Driver Annual Activity for Cost Driver
Material overhead
Procurement $400,000 Number of parts 4,000,000 parts
Production scheduling 220,000 Number of boards 110,000 boards
Packaging and shipping 440,000 Number of boards 110,000 boards
$1,060,000
Variable overhead
Machine setup $446,000 Number of setups 278,750 setups
Hazardous waste disposal 48,000 Pounds of waste 16,000 pounds
Quality control 560,000 No of inspections 160,000 inspections
General supplies 66,000 No of boards 110,000 boards
$1,120,000
Manufacturing
Machine insertion $1,200,000 Number of parts 3,000,000 parts
Manual insertion 4,000,000 Number of parts 1,000,000 parts
Wave solderiõbpx.Hmbsp; 132,000 Number of boards 110,000 boards
$5,332,000
Alex wants to calculate a new cost, using appropriate cost drivers, for each product. The new cost drivers would replace the direct labor, machine time, and overhead costs in the current costing system.