Boise Fabrications, Inc., produces composite component parts for wheelchairs. The company recently implemented an ABC system for three of its products and is interested in evaluating its effectiveness before converting to an ABC system for all of its products. To perform this evaluation the company has compiled data for the three products using both the traditional system and the new ABC system. The traditional system uses a single driver (direct materials costs). The ABC system uses a variety of cost drivers related to the activities used to produce the metal products. The three products involved in the trial run of the ABC system are wheels, frames, and handles. The following data relate to these products.

a. Determine the gross profit margin for each product produced based on the ABC data
[(Selling price – ABC cost per unit) x Unit produced].
b. Determine the gross profit margin for each product produced based on the traditional costing data [(Selling price – Traditional cost per unit) x Unit produced].
c. Provide an explanation as to why the cost of wheelchair frames may have increased under the ABC system while the cost of handles decreased.
d. Suggest what action management might take with respect to the discoveries resulting from the ABC versus traditional costing analysis. Assume that Boise Fabrications expects to produce a gross profit margin on each product of at least 40% of the sellingprice.

  • CreatedFebruary 07, 2014
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