Cabigas Company manufactures two products, Product C and Product D. The company estimated it would incur $167,140 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor hours. Data concerning the current period's operations appear below: Product C Product D Estimated volume 2,000 units 2,700 units Direct labor hours per unit 2.00 hours 0.80 hour Total hours 4000 hour 2160 hours Direct materials cost per unit $21.50 $24.10 Direct labor cost per unit $24.00 $ 9.60 1) Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year. The company is considering using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below. Use the data for questions 20 to 24.
Estimated Activity Overhead Expected Activity Cost Pool Costs Product C Product D Total Machine setups $ 13,630 130 160 290 Purchase orders 85,750 750 1,000 1,750 General factory 67,760 4,000 2,160 6,160 $167,140 2) Determine the unit product cost of each product for the current period using the activity-based costing approach. 3) Which cost method would you use to manage this business and why? 4) You are the product manager for product D and are evaluated based on product profitability. Which method would you prefer? 5) The government wants to buy product C and will pay the business for the cost of the product plus a fixed fee. Should you adopt the ABC system or keep the old plant-wide overhead system and why? 6) A customer has offered to buy a special order of 100 units of D for $60 each. This sale will not impact any other part of your business and you have excess capacity to produce this special order and will produce these extra units if you accept the order. How would this impact the business - would you be better off and by how much? Would you need other information to answer this question and, if so, what other information?