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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