Chapter C, Problem 2APSA

Requirement 1:

To determine

Determine the overhead cost to be assigned to each pup tent and each pop-tent using plantwide overhead rate based on direct labor hours.

Answer to Problem 2APSA

Product Line	Pup Tent	Pop-up Tent
Overhead Cost per unit	$46.05 per unit	$56.68

Explanation of Solution

  $\begin{array}{l}PlantwideOverheadRate=\frac{TotalOverheadCost}{TotalDirectLaborHours}\hfill \\ =\frac{\$1,130,710}{2,600DLH+1,600DLH}\hfill \\ =\$269.22\hfill \end{array}$

Computation of total overhead cost
Department A	$215,630
Department B	$399,480
Support	$515,600
Total Overhead Cost	$1,130,710

Manufacturing Overhead Cost per unit
	Pup Tent	Pop-up Tent
Overhead Cost for Product line	$699,972 (2,600 DLH X $269.22 per DLH)	$430,752 (1,600 DLH X $269.22 per DLH)
÷Number of units produced	15,200 units	7,600 units
Overhead Cost per unit	$46.05	$56.68

Requirement 2:

To determine

Compute the total cost per unit for both products if the direct materials and direct labor cost is $25 per pup tent and $32 per pop-up tent.

Answer to Problem 2APSA

Tents	Pup Tent	Pop-up Tent
Manufacturing Cost per unit	$71.05	$88.68

Explanation of Solution

Total Manufacturing Cost per Unit
Product Lines	Pup Tent	Pop-up Tent
Direct Material and Direct Labor Cost per unit	$25	$32
Manufacturing Overhead Cost per unit	$46.05	$56.68
Manufacturing Cost per unit	$71.05	$88.68

Requirement 3:

To determine

Compute the gross profit per unit for each tent if the market price of pup tent is $65 and $200 for pop-tent and determine what might management conclude about the pup tent?

Answer to Problem 2APSA

Gross Profit (loss) per unit
Pup Tent	Pop-up Tent
$(6.05)	$111.32

Since the manufacturing cost per unit of pup tent is more than the selling price per unit, the management might decide to eliminate the product or put some effort in decreasing the cost of pup tent.

Explanation of Solution

Gross Profit per unit
Product Lines	Pup Tent	Pop-up Tent
Selling Price per unit	$65	$200
Less: Manufacturing Cost per unit	$71.05	$88.68
Gross Profit (loss) per unit	$(6.05)	$111.32

Requirement 4:

To determine

Compute the total cost per unit of each tent if the direct labor and direct materials cost is $25 per pup tent and $32 per pop-up tent using ABC.

Answer to Problem 2APSA

Tents	Pup Tent	Pop-up Tent
Manufacturing Cost per unit	$58.46	$113.87

Explanation of Solution

Computation of Total Manufacturing Overhead Cost
	Pup Tent	Pop-up Tent
Pattern alignment	$16,100 (140 batches x $115)	$48,300 (420 batches x $115)
Cutting	$28,700 (7,000 MH x $4.10)	$21,730 (5,300 MH x $4.10)
Moving product	$33,600 (800 moves x $42)	$67,200 (1,600 moves x $42)
Sewing	$202,800 (2,600 DLH x $78)	$124,800 (1,600 DLH x $78)
Inspecting	$9,600 (240 insp. x $40)	$14,400 (360 insp. x $40)
Folding	$31,920 (15,200 units x $2.10)	$15,960 (7,600 units x $2.10)
Designing	$70,000 (70 mod. x $1,000)	$210,000 (210 mod. x $1,000)
Providing space	$25,800 (4,300 sq. ft. x $6)	$25,800 (4,300 sq. ft. x $6)
Material handling	$90,000 (450,000 sq.yd. x $0.20)	$94,000 (470,000 sq.yd. x $0.20)
Total Overhead Cost	$508,520	$622,190

  $\begin{array}{l}ManufacturingOverheadRate=\frac{TotalOverheadCost}{UnitsProduced}\hfill \\ \hfill \\ PupTent=\frac{\$508,520}{15,200units}\hfill \\ =\$33.46perunit\hfill \\ \hfill \\ Pop-upTent=\frac{\$622,190}{7,600units}\hfill \\ =\$81.87perunit\hfill \end{array}$

Total Manufacturing Cost per Unit
Product Lines	Pup Tent	Pop-up Tent
Direct Material and Direct Labor Cost per unit	$25	$32
Manufacturing Overhead Cost per unit	$33.46	$81.87
Manufacturing Cost per unit	$58.46	$113.87

Requirement 5

To determine

Using ABC results, determine the gross profit per unit of each tent if the market price is $65 per pup tent and $200 per pop-up tent and suggest whether each product line would be profitable or not.

Answer to Problem 2APSA

Gross Profit per unit
Pup Tent	Pop-up Tent
$6.54	$87.13

Using the ABC method, both product line are profitable because the selling price of both products are greater than their manufacturing cost.

Explanation of Solution

Gross Profit per unit
Product Lines	Pup Tent	Pop-up Tent
Selling Price per unit	$65	$200
Less: Manufacturing Cost per unit	$58.46	$113.87
Gross Profit per unit	$6.54	$87.13

Under Activity Based Costing method, the cost concerning both tent are assigned accurately according to their actual activity. The cost of pup tent is adjusted to pop-up tent thereby decreasing the cost of pup tent and increasing the cost pop-up tent.