Question

Exercise 17-9 Using ABC to assess prices LO P3 Way Cool produces two different models of air conditioners. The company produces the mechanical systems in their components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow. Process Activity Components Changeover Machining Setups Driver Number of batches Machine hours Number of setups Quantity 930 8,300 140 Finishing Welding Inspecting Rework Overhead Cost $ 627,750 388,440 261,100 $1,277,290 $ 324, 380 266,175 63,700 $ 654, 255 $ 200,020 30,700 105,380 $ 336,100 Welding hours Number of inspections Rework orders 4,900 845 260 Support Purchasing Providing space Providing utilities Purchase orders Number of units Number of units 548 7,200 7,200 Additional production information concerning its two product lines follows. Units produced Welding hours Batches Number of inspections Machine hours Setups Rework orders Purchase orders Model 145 2,400 800 465 525 2,950 70 160 365 Model 212 4,800 4,100 465 320 5,350 70 100 183 Required: 1. Using ABC, compute the overhead cost per unit for each product line. 2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $200 for Model 145 and $117 for Model 212. 3. If the market price for Model 145 is $624.93 and the market price for Model 212 is $377.70, determine the profit or loss per unit for each model.

Answer 1

Solution 1:

Allocation of overhead and computation of overhead cost per unit - ABC
Activity	Expected cost	Activity Base	Expected Activity	Activity Rate	Model 145		Model 212
					Activity Driver incurred	Overhead assigned	Activity Driver incurred	Overhead assigned
Component:
Changeover	$6,27,750	Nos of batches	930	$675.00	465	$3,13,875	465	$3,13,875
Machining	$3,88,440	Machine hours	8300	$46.80	2950	$1,38,060	5350	$2,50,380
Setup	$2,61,100	Nos of setups	140	$1,865.00	70	$1,30,550	70	$1,30,550
Finishing:
Welding	$3,24,380	Welding hours	4900	$66.20	800	$52,960	4100	$2,71,420
Inspecting	$2,66,175	Nos of inspections	845	$315.00	525	$1,65,375	320	$1,00,800
Rework	$63,700	Rework orders	260	$245.00	160	$39,200	100	$24,500
Support:
Purchasing	$2,00,020	Purchase orders	548	$365.00	365	$1,33,225	183	$66,795
Providing space and utilities	$1,36,080	Nos of units	7200	$18.90	2400	$45,360	4800	$90,720
Total Overhead costs						$10,18,605		$12,49,040
Total units produced						2400		4800
Overhead cost per unit						$424.42		$437.39

Solution 2:

Computation of Per unit Cost
Particulars	Model 145	Model 212
Direct material and labor	$200.00	$117.00
Overhead cost per unit	$424.42	$320.39
Cost per unit	$624.42	$437.39

Solution 3:

Computation of Profit (Loss) per unit
Particulars	Model 145	Model 212
Selling price per unit	$624.93	$377.70
Cost per unit	$624.42	$437.39
Profit (Loss) per unit	$0.51	-$59.69