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solving for setup hours standard briefcases specialty briefcases

no. of setups in a month (a) 10 25
no. of hours per setup (b) 1 2
setup hours (a x b) 10 50

solving for machine-hours

no. of batches processed per month (a) 10 25
no. of units in a batch (b) 1000 100
no. of units produced in a month (a x b) 10000 2500
machine hours required per unit 0.5 1.2
machine hours 5000 3000

activity cost pool estimated overhead cost per activity no. of activities in a measure unit activity
rate
purchasing 15000 300 number of orders 50
material handling 16000 400 number of 40
receipts
production orders and setups 6000 60 set-up hours 100
inspection 18000 600 inspection-hours 30
frame assembly 12000 1500 assembly-hours 8
machine-related 32000 8000 machine-hours 4

Activity Measure Standard Briefcases Specialty Briefcases Total

Number of orders 120 180 300
Number of receipts 155 245 400
Set-up hours 10 50 60
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JMJ

Inspection-hours 200 400 600

assembly-hours 700 800 1500
machine-hours 5000 3000 8000

Activity Measure Standard Briefcases (cost) Specialty Briefcases (cost) Total

Number of orders 6000 9000 15000
Number of receipts 6200 9800 16000
Set-up hours 1000 5000 6000
Inspection-hours 6000 12000 18000
assembly-hours 5600 6400 12000
machine-hours 20000 12000 32000
Totals 44800 54200 99000
divide by: no. of units per product 10000 2500
Manufacturing Overhead per unit (1) 4.48 21.68

Unit Product cost Standard Briefcases Specialty Briefcases

Direct Materials 10 20
Direct Labor 6 4.8
Manufacturing Overhead 4.48 21.68
Product Cost (2) 20.48 46.48

3.

Selling Price 26.25 42.5

Unit Product Cost (ABC Costing) 20.48 46.48
Gross Profit/Gross Margin 5.77 -3.98
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JMJ

It is highly recommended that the company does not by any means shift entirely to the production of specialty briefcases. As the truly profitable
of the two lines is that of the standard line. The application of direct labor hours as the only method of allocating manufacturing overhead has
simply distorted the costs as it had ignored other major activities that consumed overhead resources.

4. We suppose that the competition was completely unable to touch the companys price for the reason that they had more accurate costing at
their disposal. At the rate the company is selling the aforementioned product it is actually losing money.