Biology Forums - Study Force

Whitman Printing Ltd. has contracts to complete weekly supplements required by its' customers. For the current year, manufacturing overhead cost estimates total $336,000 for an annual production capacity of 12 million pages.

Whitman Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:
   Manufacturing
Cost pool   overhead costs   Activity level
Design changes   $ 60,000   200 design changes
Setups   96,000   8,000 setups
Inspections   180,000   12,000 inspections
   Total manufacturing overhead costs   $336,000

Two customers, Money Managers and Hospital Systems, are expected to use the following printing services:

Activity   Money Managers   Hospital Systems
Pages   80,000   96,000
Design changes   10   0
Setups (one per job)   50   12
Inspections   40   12
Designs (one per job)   50   12

Pages are a direct cost at $0.03 per page. Design costs per job average $1,000 and $1,200 for Money Managers and Hospital Systems, respectively. Whitman Printing sets prices at $0.10 per page plus 120% of design costs.

Assume that all costs are variable.

Required:
Prepare income statements in contribution margin format for both customers using:
a.   Traditional (simple) costing with overhead applied on a page capacity basis
b.   Activity-based costing
c.   How much a page should Money Managers be charged if Whitman Printing wants to breakeven on this customer? Assume that manufacturing overhead costs are fixed and that they are allocated to customers based on pages sold as a percentage of production capacity; and, that design costs are also fixed.

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