Chapter 5, Problem 49P

Maxey & Sons manufactures two types of storage cabinets—Type A and Type B—and applies manufacturing overhead to all units at the rate of $80 per machine hour. Production information follows.

The controller, who is studying the use of activity-based costing, has determined that the firm’s overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours, and outgoing shipments, which are the activities’ three respective cost drivers, follow.

The firm’s total overhead of $3,080,000 is subdivided as follows: manufacturing setups, $672,000; machine processing. $1,848,000: and product shipping, $560,000.

Required:

1. 1. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using the company’s current overhead costing procedures.
2. 2. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing.
3. 3. Is the cost of the Type A storage cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?
4. 4. Assume that the current selling price of a Type A storage cabinet is $260 and the marketing manager is contemplating a $30 discount to stimulate volume. Is this discount advisable? Briefly discuss.