Entry Way Manufacturing produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labor dollars. For 2010, Entry Way compiled the following data for the two products:
Deluxe Standard
Sales units 50,000 400,000
Sales price per unit $650.00 $475.00
Direct material and labor costs per unit $180.00 $130.00
Manufacturing support costs per unit $ 80.00 $120.00
Last year, Entry Way 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 for 2010:
Activity Cost Driver Cost Total Deluxe Standard
Setups of setups $ 500,000 500 400 100
Machine-related of machine hours $44,000,000 600,000 300,000 300,000
Packing of shipments $ 5,000,000 250,000 50,000 200,000
Required:
a. Using the current system, what is the estimated:
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 than the standard door. How much are the estimated manufacturing overhead costs for each door and what is a likely explanation for this?
c. Review the machine-related costs above. What is a likely explanation for machine-related costs being so high? What might explain why total machining hours for the deluxe doors (300,000 hours) are the same as for the standard doors (300,000 hours)?
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?
f. What considerations need to be examined when determining a sales mix strategy?
g. Explain (in detail) how activity based costing systems can provide more accurate product costs than traditional cost systems.
h. Explain how traditional cost systems, using a single unit-level cost rate, may distort product costs.