Come-On-In Manufacturing produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labour dollars. For 2012, Come-On-In 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 labour costs per unit $180.00 $130.00
Manufacturing support costs per unit $80.00 $120.00
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:
Activity Cost Driver Cost Total Deluxe Standard
Setups # of setups $500,000 500 400 100
Machine related # of machine hours $4,000,000 600,000 300,000 300,000
Packing # of shipments $5,000,000 250,000 50,000 200,000
Required:
a. Using the current traditional (simple) costing system, determine 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 traditional cost 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?
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?
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