Come-On-In Manufacturing produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs (indirect costs) has been direct labor dollars. For 2010, Come-On-In compiled the following data for the two products:
Standard Deluxe
Sales units 400,000 units 50,000 units
Sales price per unit $475.00 $650.00
Direct material and labor costs per unit $130.00 $180.00
Manufacturing support costs per unit $120.00 $80.00
Last year, Come-On-In Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information (indirect cost activities) for 2010:
Required:
a. Using the current system, what is the estimated value for the following?
1. Total cost of manufacturing one unit for each type of door?
2. Profit per unit for each type of door?
b. Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe door ($80 per unit) than the standard door ($120 per unit). What is a likely explanation for this? Direct your response in terms of the current allocation base used and how the recently adopted robotics system is changing the past cost allocation system.
c. Is there any logic in the number of set ups per type of product? (The Standard Product has 100 setups while the Deluxe Product has 400 setups).
d. Using the activity-based costing data presented above,
1. Compute the cost-driver rate for each overhead activity.
2. Compute the revised manufacturing overhead cost per unit for each type of entry door.
3. Compute the revised total cost to manufacture one unit of each type of entry door.
e. Is the deluxe door as profitable as the original data estimated? Why or why not?