Chapter 5, Problem 5.41P

Unused capacity, activity-based costing, activity-based management. Archer Pro manufactures two models of sport bows, Basic and Deluxe, using a combination of machining and hand finishing. Machine setup costs are driven by the number of setups. Indirect manufacturing labor costs increase with direct manufacturing labor costs. Equipment and maintenance costs increase with the number of machine-hours, and facility rent is paid per square foot. Capacity of the facility is 10,000 square feet, and Archer Pro is using only 75% of this capacity. Archer Pro records the cost of unused capacity as a separate line item and not as a product cost. For the current year, Archer Pro has budgeted the following:

Archer Pro Budgeted Costs and Activities for the Year Ended December 31, 2017
Direct materials—Basic bows	$ 450,000
Direct materials—Deluxe bows	320,000
Direct manufacturing labor—Basic bows	155,000
Direct manufacturing labor—Deluxe bows	195,000
Indirect manufacturing labor costs	105,000
Machine setup costs	60,000
Equipment and maintenance costs	264,000
Facility rent	250,000
Total	$1799,000

Other budget information follows:

	Basic	Deluxe
Number of bows	10,000	5,000
Machine-hours	15,000	18,000
Number of setups	500	300
Square footage of production space used	4,000	3,500

1. 1. Calculate the cost per unit of each cost-allocation base.

  Required

1. 2. What is the budgeted cost of unused capacity?
2. 3. Calculate the budgeted total cost and the cost per unit for each model.
3. 4. Why might excess capacity be beneficial for Archer Pro? What are some of the issues Archer Pro should consider before increasing production to use the space?