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146. Volume-Based Costing Versus ABC: Gorden Company produces a variety of electronic
products. One of its plants produces two laser printers, Speedy and Deluxe. At the beginning of
2013, the following data were prepared for this plant:
Deluxe Speedy
Quantity 50,000 400,000
Selling price $475.00 $300.00
Unit prime cost 180.00 110.00
Unit overhead cost 20.00 153.60
The unit overhead cost is calculated using the predetermined overhead application rate based
on direct labor-hours.
Upon examining the data, the marketing manager was particularly impressed with the per-unit
profitability of the Deluxe printer and suggested that more emphasis be placed on producing and
selling this product. The plant supervisor objected to this strategy, arguing that the Deluxe model
required a very delicate manufacturing process. The supervisor believed that the cost of the
Deluxe printer was likely to be much higher than reported.
The controller suggests an activity-based costing system and provides the following budget data
pertaining to the period:
Activity Consumption
Overhead Activity Cost Driver Pool Rate* Deluxe Speedy
Setups Number of setups $2,800 200 100
Machine costs Machine-hours 100 100,000 400,000
Engineering Engineering-hours 40 45,000 120,000
Packing Packing orders 20 50,000 200,000
* Cost per unit of cost driver
Required:
1. Using the projected data based on the firm's current costing system, calculate gross profit per
unit and gross profit percentage for each product. Round calculations to 2 decimal places.
2. Using the suggested multiple cost drivers' overhead rates, calculate the overhead cost per unit
for each product and determine gross profit per unit and gross profit percentage for each
product.
3. Based on your results, evaluate the suggestion of the marketing manager to emphasize the
Deluxe model.
4. How does ABC contribute to Gorden's competitive advantage?
147. Customer Profitability Analysis: Boston Depot sells office supplies to area corporations
and organizations. Tom Delayne, founder and CEO, has been disappointed with the operating
results and the profit margin for the last two years. Business forms are mostly a "commodity"
business with low profit margins. To increase profit margins and gain competitive advantages,
Delayne introduced "Desk-Top Delivery" service. The business seems to be as busy as ever. Yet,
the operating income has been declining. To help identify the root cause of declining profits, he
decided to analyze the profitability of two of the firm's major customers: Omega International (OI)
and City of Albion (CA).
According to the customer profitability analysis that Boston Depot conducts regularly, Boston
Depot has the same amount of total sales with both OI and CA. However, the firm earns a higher
gross margin and gross margin ratio from CA than those from the sales to OI, as demonstrated
here:
Customer Profitability Analysis
Omega International City of Albion
Sales $80,000 $80,000
Product cost (50,000) (48,000)
Service fees (17.5% of sales) (14,000) (14,000)
Gross margin $16,000 $18,000
Gross margin percent 20% 22.5%
Boston Depot adds a flat 17.5 percent to all sales for expenses incurred in such activities as
handling customers' requests, pick-packing, order delivery, warehousing, and data entry.
However, not all customers require the same level of services. Operation Manager, Jamie Steel,
points out that CA has been a much heavier service user than OI. She shows the following data to
support her belief:
Distribution Services Activities for OI and CA
OI CA
Number of requisitions 300 700
Requisition line (all pick-packing) 900 2,100
Average number of cartons in warehouse 50 500
Number of miles per delivery 5 6
Controller Rod Jay has been investigating ways to determine the costs of performing various
activities. He summarized his findings:
Total Estimated Estimated Annual
Activity Annual Expense Cost Driver Activity Level
Requisitions handling $3,000,000 Requisitions 300,000
Warehouse 1,050,000 Number of cartons 70,000
Pick-packing 900,000 Pick-pack lines 600,000
Data entry 600,000 Pick-pack lines 600,000
Delivery charge $10 per requisition (delivery) plus $0.30 per mile
Steel points out that activities cost money. Two customers who request different service
activities most likely are not costing the firm the same.
Required:
1. Using activity-based costing, compute the charges per unit of service activities.
2. Using activity-based costing, compute the total distribution costs for each of the customers.
3. Is the City of Albion a more profitable customer?
4. Is Omega International a better customer for Boston Depot?
148. Customer Profitability Analysis: Spring Company collected the following data pertaining
to its activities with selected customers.
HS Inc. Adventix Baldwin
Total sales $600,000 $750,000 $900,000
Sales discount a 2% 3% 2%
Sales terms b 2/10, n/30 1/15, n/60 2/10, n/eom
Shipping terms FOB Shipping point FOB Destination FOB Destination
Sales returns rate c 2% 4% 3%
Number of orders d 10 5 50
Units per order 100 250 30
Expedited order 0 2 5
Sales visits 1 1 2
Number of sales returns 3 4 10
a Sales discounts are incentives offered on the full invoice price
b Sales terms are an incentive in the form of a reduction of the net invoice amount to customers that pay
an invoice early
c Sales returns are all completed within the first 10 days of this billing month
d Each order is filled in a single delivery
Spring Company mails monthly statements on or before the first day of each month. HS pays all
of its account payables within the payment discount periods. Adventix does not take the early
payment discounts. In fact, the company pays half of its accounts on the date that these
accounts are due and pays the remainder at the end of the following month. Baldwin also does
not take advantage of discounts for early payments. However, it pays its accounts on the
specified due date. Cost of goods sold is sixty percent of gross sales price. Joan Lieberman, the
controller of Spring Company, has estimated that the cost of working capital is approximately 2
percent per month.
Lieberman also gathered the following cost data:
Activity Cost Driver and Rate
Order taking $50 per order
Order processing $75 per order
Delivery $300 per delivery
Expedited orders $500 per order
Restocking $10 per unit plus $200 per return
Sales visits $800 per visit
Required:
Prepare and interpret a customer profitability analysis for Spring Company. How does it help
Spring Company become more competitive and profitable?
149. Volume-based Versus ABC Overhead Rate: Medical Arts Hospital (MAH) uses a
hospital-wide overhead rate based on nurse-hours. The intensive care unit (ICU), which has 30
beds, applies overhead using patient-days. Its budgeted cost and operating data for the year
follow:
Hospital Budget Information
Hospital total overhead $57,600,000
Hospital total nurse-hours 1,152,000
Budget Cost Driver Information for ICU for the Month of June
Cost Pool Budget Cost Cost Driver Budget Cost Driver Activity
Facilities and equipment $2,400,000 Number of patient-days 7,500
Nursing care 3,000,000 Number of nurse-hours 80,000
In June, MAH's intensive care unit had the following operating data:
81,000 nurse-hours
7,250 patient-days
Required:
1. Calculate the ICU's overhead costs for the month of June using
a. The hospital-wide rate
b. The ICU department-wide rate
c. The cost driver rates for the ICU department
2. Explain the differences and determine which overhead assignment method is more
appropriate.
