Question: Unused capacity, activity-based costing, activity-based management. Archer Pro manufactures two models of sport bows, Basic and Deluxe, using a combination of machining and hand finishing. Machine setup costs are driven by the number of setups. Indirect manufacturing labor costs increase with direct manufacturing labor costs. Equipment and maintenance costs increase with the number of machine-hours, and facility rent is paid per square foot. Capacity of the facility is 10,000 square feet, and Archer Pro is using only 75% of this capacity. Archer Pro records the cost of unused capacity as a separate line item and not as a product cost. For the current year, Archer Pro has budgeted the following:
Other budget information follows:
1. Calculate the cost per unit of each cost-allocation base.
2. What is the budgeted cost of unused capacity?
3. Calculate the budgeted total cost and the cost per unit for each model.
4. Why might excess capacity be beneficial for Archer Pro? What are some of the issues Archer Pro should consider before increasing production to use the space?